Reconstructing Fletcher Building

The residential unit still sticks out.

Image from Ricardo Gomez Angel on Unsplash.

Fletcher Building’s $315.6 million sale of its construction arm is a big step to resolving the existential crisis the building materials firm’s been grappling with.

The tearing down of the old Fletcher empire built up by Ralph Waters, Jonathan Ling and Mark Adamson through the 2000s and 2010s marks another turning point in the storied company that’s been cast at times as the national champion and others as the arch-villain.

The building materials firm could do no wrong when it emerged from the 2001 carving up of Fletcher Challenge, growing its earnings profile rapidly as it hoovered up businesses on both sides of the Tasman and notched up six years of double-digit gains in its share price until 2007, when it made a much bolder foray abroad, buying US laminates business Formica for US$700 million at what turned out to be the top of the American housing boom.

The Formica acquisition was followed a few years later by Fletcher’s push into Australian plumbing with its $1 billion acquisition of the then-ASX-listed Crane Group, which similarly threw up all kinds of issues for the Kiwi champion to gloss over while it retained the confidence of investors.

A million dead end streets

That all started coming to a halt in 2017 when it became apparent its vertical construction business was out of control, with cost-blow-outs amplified by an increasingly unpopular chief in the form of Adamson.

Investment banks and analysts started agitating for a break-up of the company back then, the most strident coming from the late Brian Gaynor in one of his regular dispatches for the New Zealand Herald.

A clean sweep of senior leadership team and boardroom reshuffle was thought to have steadied the ship, with assets sold and new money raised, but apparently not every hole had been plugged because another shakeout was required in 2024, putting Andrew Reding in the hot seat to map out Fletcher’s new future.

After what seemed like an interminably slow wait for impatient armchair experts, a slimmed down company, with less debt and focused on making and selling building materials, is starting to look like a reality.

There’s gonna have to be a different man

Fletcher’s out of the actual building things game, with the sale of the heavy construction division in New Zealand and the Higgins and Brian Perry civil works and engineering units to French multinational Vinci – better known on these shores as the owner of the HEB Construction civil works firm.

Fletcher keeps the liabilities attached to any existing disputes, including the never-ending sob story of SkyCity’s international convention centre, but the sale price comes in at the upper end of Forsyth Barr’s expectations on the earnings multiple and is still above the $177 million book value for the business.

Plus it staunches the cash drain that the construction segment’s contributed in recent years - its losses since 2016 significantly exceeded $1 billion.

All up, the transaction has got a warm reception in marketland, even if there have been some lamenting the end of an era through a very rose-tinted lens of nostalgia.

The deal still has the usual regulatory hoops to jump through, although it’s hard to see the Commerce Commission getting its knickers in a twist, with settlement expected next year.

Watch the ripples change their size

That might even pave the way for a capital return or an early resumption to dividends, given Fletcher’s within cooee of reaching its target net debt range of between $400 million and $900 million.

And where that gets a little more interesting is how much of a sore thumb the residential development division looks like now.

Sure, we already know Fletcher’s been running the rule over the house-building arm under the auspices of a strategic review – code for we’re shopping this thing around – as the increasingly decentralised building materials firm sees less pull-through value accruing from owning all parts of the chain.

Fletcher’s book value on the residential unit was $847 million at the end of June, with similar deals across the Tasman suggesting a sale could fetch as much as $1 billion, almost a quarter of the company’s $4.1 billion market value on the stock exchange.

Of course, deals of that size don’t tend to move quickly, which might actually be in Fletcher’s favour.

Immune to your consultations

Yes, the economy is on the mend, but the property market remains sluggish and looks like it will need a few more tailwinds before perking up, such as an end of the local exodus from the country which has been sapping house sales demand.

The latest migration figures hinted at the tide turning on local citizens calling it quits on New Zealand, and a firming up of that trend would certainly improve Fletcher’s negotiating position, if and when it has some pointier conversations about the residential division.

In saying that, pragmatism should trump purity. If the price isn’t right, it’s easy to imagine the board squirming under shareholder questions given the residential unit turns a profit and has been an important source of cash.

But if the stars do align, it could well be that 2027 is when a new Fletcher emerges from the latest bonfire of the vanities, flush with cash and firmly focused on the types of building materials governments love for a spot of nation-building.

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years.