EUR 850.00 For Business Accounts Only

Morningstar | Brambles Receives a Fair Price for IFCO, and Can Now Focus on Core CHEP Offering; FVE Unchanged

The USD 2.5 billion sale price for wide-moat Brambles’ IFCO segment, to a wholly owned subsidiary of the Abu Dhabi Investment Authority, is largely in line with our expectations, and we maintain our AUD 11.20 per share fair value estimate. Following Brambles’ full-year results and original announcement of an IFCO separation in August 2018, we estimated the segment could fetch around USD 2.8 billion before tax, at about 11 times trailing EBITDA, while the final deal was struck at about 10% below our prior estimate, at a 10 times multiple. Nonetheless, we note the net proceeds of USD 2.36 billion reflect minimal capital gains taxes owed, and the timing of the deal--scheduled to be completed by mid-calendar 2019--is a bit ahead of management’s prior estimate of year-end 2019. These factors offset the slightly lower price than we had previously assumed.

Proceeds from the deal will be used primarily for a sizable on-market share buyback for up to USD 1.95 billion over the course of the year following completion of the transaction, representing a maximum of 10% of Brambles’ shares outstanding. The company also plans to return additional cash to shareholders through a USD 300 million dividend payout, with the remaining cash used to pay down debt.

We generally would prefer to see greater dividend payouts and debt reduction rather than share repurchases when the stock is trading above our fair value estimate, but nonetheless expect a positive impact from the deal as management can now concentrate on Brambles’ core CHEP pallet pooling business. However, we continue to forecast the consolidated financials of both Brambles and IFO as we await further details on timing and necessary approvals from shareholders and regulators.