Competition concerns are likely to prevent Fletcher Building from buying all of the wood products assets put up for sale by Carter Holt Harvey (CHH), analysts say. However, Fletcher Building could end up with most of the New Zealand businesses, paying around $800 million and staying within its debt comfort zone. Auspine, Hyne or Weyerhaeuser are the likely buyers of the Australian assets.
CHH's wood products businesses, put on the block by Graeme Hart's Rank Group, have a price tag of $2 billion to $2.5 billion. The Commerce Commission and its trans-Tasman counterpart, the Australian Competition and Consumer Commission, would balk at Fletcher Building swallowing all of the operations on sale - Wood Products NZ, Wood Products Australia and the Carters retail chain, First NZ Capital analyst Andrew Mortimer said.
Fletcher Building owns the Placemakers chain, which buys more than half of CHH's domestic lumber. It therefore has a strategic opportunity to lock in security of supply, Mortimer said. But the potential for vertical integration would worry the Commerce Commission.
A bigger hurdle was the particle board market which would be 100% owned by Fletcher Building if it subsumed CHH. The companies dominate the medium density fibreboard market between them and Mortimer said a combination of these assets was unlikely to be allowed. Combining CHH and Placemakers presented fewer problems as consolidation would comprise only 36% of the building supplies market.
Fletcher Building might also not want to see CHH fall into a competitor's hands. The combined sales in the trade market, however, "might aggregate to around 45% within acceptable levels so as to not substantially lessen competition". "Of more concern might be the consolidation of market share in certain product lines, including timber, insulation and wallboard." The company faces a big hurdle if it wants to own both CHH's manufacturing and distribution businesses.
Nevertheless, Fletcher Building should be interested in the New Zealand wood products and distribution businesses, given the improved distribution capability and the ability to secure supply, Mortimer said. More margin might be available in the supply chain under Fletcher Building ownership. However, there was little value for Fletcher Building in CHH's Australian assets. "Fletcher would have no particular distribution advantage and would acquire only a modestly attractive market share."
US firm Weyerhaeuser, which has just sold its New Zealand forestry interests, was a more natural candidate for the Australian business. CHH, Weyerhaeuser and another company, Hyne, command around 60% of the softwood lumber market across the Tasman and the acquisition of CHH would present both with an excellent consolidation opportunity.
The Australian market is fragmented and the CHH sale presents a chance for one of these three players to consolidate. Interested parties are understood to be conducting due diligence and indicative bids for CHH are expected this week. Final bids are due by late November.
