Brambles Satisfies Investors
On 25 February, Brambles entered into a binding agreement to sell its IFCO reusable plastic containers (RPC) business for a value of US$2.5 billion. The sale was subject to regulatory approvals. Brambles – in more recent times – announced that the sale was completed on 3 June. The business was sold to private equity firm Triton and Luxinva, a subsidiary of the Abu Dhabi Investment Authority.
Brambles’ CEO Graham Chipchase stated the sale will allow the company to focus on “strategic priorities and to pursue continued revenue growth” within their core markets. Mr Chipchase said the transaction allowed the company to review “additional opportunities in emerging markets, through product and service innovation and use of technology through the supply chain.”
The buyer of IFCO, Triton has 37 companies in its portfolio which is equivalent to approximately €13 billion. The company invest in and support the development of medium-sized businesses headquartered in Europe. The other buyer, Abu Dhabi Investment Authority, is a global investment institution that invests funds on behalf of the Government of Abu Dhabi.
The completion of the sale would make IFCO into a fully independent company. IFCO CEO Wolfgang Orgeldinger believed this independence will “drive growth” by expanding their “customer base.” The CEO was sure that the company will “build on” the previous financial performance and that IFCO “is well positioned for its future as an independent company.”
Loss of a powerhouse?
Despite the sale of the seemingly strong business, Brambles’ financial guidance for 2019 remained unchanged. The company expected that the profit growth will improve compared to the prior year. Cash generation for the second half of the financial year 2019 remained in line with expectations, which is anticipated to perform better than the first half.
Mr Chipchase said the “volume momentum was strong across all CHEP segments” for the year-to-date sales performance. Despite the strong momentum, macroeconomic conditions in Europe had hindered volume growth in the third quarter.
Uncertainty involving Brexit had forced Brambles to invest an extra $15 million in pallets in Britain. International trade between the UK and Europe attributed 10% of Bramble’s European sales volumes. Thus, the company had contingency plans to prepare for the worst of the Brexit scenarios.
The trade dispute between China and the US have yet to reach a conclusion. The fallout may also affect Brambles’ global operation as both countries continue to engage in a tit-for-tat battle.
Acquisition of IFCO
IFCO was acquired by Brambles in 2010 for an enterprise value of US$1.25 billion. The company is based in Germany and the RPCs are primarily used to transport fresh produce to grocery retailers across Europe, the United States, Asia and Africa. IFCO helps retailers and producers by maximising efficiency, product quality, safety, and sustainability throughout the supply chain.
Since IFCO was acquired, it had grown in the market, serving more than 320 retailers and over 14,000 producers in over 50 countries. The RPCs were used by over 1.6 billion shipments of fresh produce. In the financial year 2018, the company generated revenues of more than US$1.1 billion, an annual growth of 8%. EBITDA was US$248 million and underlying profit was US$133 million. For the first nine months of the fiscal year 2019, IFCO helped Brambles contributed nearly 20% towards the total sales revenue.
Where do the proceeds from the sale go?
Brambles expected the sale will create approximately US$2.36 billion of net cash proceeds. In the announcement on February, Brambles indicated that the proceeds from the transaction would return to the shareholders as much as US$1.95 billion, through a combination of pro-rata return of cash of around US$300 million and shares buyback of up to US$1.65 billion. Other proceeds will be used to repay the debt to maintain approved credit policy.
The on-market share buyback will start in early June, before Brambles halts the trading period from 23 June to 21 August. The return of cash will be made to all its shareholders in October and expected to be approximately 29 cents per share. At the moment, the cash remains subject to ATO’s ruling and shareholders’ approval at the 2019 Annual General Meeting.
Following the completion of the sale, Brambles had commenced its on-market buyback on 4 June and 5 June. The first transaction bought back 500,000 shares at $6.1 million. The second buyback was a total of 630,000 shares worth $7.9 million.
At the beginning of 2019, Brambles’ share traded at $9.98. Since then, the stock had surged up by more than 25%. Following the announcement of the sale, the share price had jumped up 5.7% to $12.74.
Ahead of Brambles’ blackout period between 23 June and 21 August, it is possible that the company’s share price will continue to experience further growth. With an optimistic outlook in Brambles’ earnings guidance, unless macroeconomic conditions drastically worsen, growth opportunities remain significant for the company.
By Jack Lee
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