April 12, 2018 / 11:25 PM / in 8 days

NZ's Fletcher posts biggest share gain in 18 years on Wesfarmers bid talk

WELLINGTON/SYDNEY (Reuters) - New Zealand’s Fletcher Building Ltd (FBU.NZ) posted its biggest share gain in 18 years on Friday, after a media report that Australia’s Wesfarmers Ltd (WES.AX) - on the lookout for deals - bought a small stake with an eye to a takeover.

FILE PHOTO: A sign for Fletcher Building Ltd, New Zealand's biggest builder, adorns a crane at a construction site in the New Zealand city of Auckland, June 25, 2017. REUTERS/David Gray

The Sydney Morning Herald, citing unidentified people close to Wesfarmers, said the Australian mining-to-home improvement conglomerate had acquired 3 to 4 percent of New Zealand’s biggest construction company.

Wesfarmers declined to comment when contacted by Reuters. Fletcher, in a statement, said it had no knowledge of Wesfarmers owning its shares and “can neither confirm nor deny the report”. Reuters was unable to confirm the deal.

Perth-headquartered Wesfarmers is currently in the midst of its biggest portfolio shake-up in over a decade. In that light, market watchers quickly cast the embattled Fletcher as the kind of turnaround target the Australian firm has sought in the past.

Fletcher’s shares shot up as much as 14 percent to a five-week high following the report, pushing the firm’s market capitalization to around NZ$4.6 billion ($3.3 billion). By comparison, Wesfarmers is currently worth A$47 billion ($37 billion).

“If (Wesfarmers) were looking for a counter-cyclical, beaten up industrial with bad management, Fletcher Building ticks all the boxes,” said Mathan Somasundaram, Market Portfolio Strategist at stockbroker Blue Ocean Equities.

“In three or four years, when the next cycle comes around, this thing will be worth a lot and they can offload it.”

The builder has been battered by investors after bungling the biggest construction boom in living memory in New Zealand. Spiraling costs have pushed the firm to losses, cost the chief executive his job and sent shares close to 12-year lows.

    Wesfarmers, meanwhile, is in acquisition mode as it sells down its coal mines and spins off its capital-hungry supermarket chain Coles, freeing up cash for faster-growing investments.

    Perth stockbroker James McGlew said Fletcher’s hardware businesses could offer synergies with Wesfarmers’ largest earner, Australian hardware chain Bunnings.

    “The sum of the parts here is greater than the whole at the moment. The company is being discounted by the market because of its performance,” he said, adding a deal would “make sense”.

    To be sure, Wesfarmers’ recent record is hardly unblemished.

    Its 2016 acquisition of British hardware chain Homebase has proved a disaster, prompting a $1 billion write-off in February. Its turnaround of Coles, which it bought as a basket case for $16 billion in 2007, took a decade.

    Jason Beddow, head of fund manager Argo Investments Ltd (ARG.AX), which owns shares in both Wesfarmers and Fletcher, said he saw little rationale for the foray across the Tasman.

    With Fletcher’s problems mostly confined to the commercial construction division and its businesses all domestically focused, “it doesn’t really give them much growth,” he said of Wesfarmers.

    Shares in Wesfarmers closed 0.2 percent lower at A$41.04, while Fletcher shares gave up some of their gains to close 8.6 percent higher at NZ$6.34, as the broader markets in both countries ticked higher.

    Reporting by Charlotte Greenfield in WELLINGTON, Tom Westbrook and Paulina Duran in SYDNEY; Editing by Jane Wardell and Christopher Cushing

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