The joint venture will be 60 per cent owned by CSR and 40 per cent owned by Boral but neither party will pay cash up front.
The companies expect initial overhead savings of $7 million to $10 million after the integration of the businesses that have a combined revenue of $230 million. The companies will look to consolidate manufacturing sites to lower production costs and develop high value land assets.
Brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market, CSR and Boral said in a release to the Australian Securities Exchange.
?This joint venture is aimed at driving efficiencies across the combined network of operations and would provide a path for Boral to realise acceptable returns for our brick business and therefore secure our long-term commitment to the industry,? Boral chief executive Mike Kane said.
CSR chief executive Rob Sindel added the venture was about ?retaining manufacturing in Australia and maintaining clay bricks as a choice for consumers in a broader cladding market?.
CSR will control the joint venture, which means it will run the show and Boral will make a staged withdrawal from the market. The venture would cover 12 plants in Victoria, New South Wales, Queensland and South Australia with a capacity of 606 million bricks a year. Close to a quarter of that capacity has already been mothballed.
The merger would take in 540 workers but there would be job losses as marketing and back office roles were pared. CSR and Boral also warned of further ?consolidation? of brick plants over the longer term.
The deal does not include the land at Boral?s Scoresby plant in Melbourne?s southeast or CSR?s Schofield?s plant in Western Sydney. Investment bank UBS estimates Boral?s Scoresby plant could be worth up to $250 million if rezoned and sold off as residential property. Boral will have an option to terminate the lease at Scoresby in 10 years but must provide three years? notice. The Schofields site will be leased to the joint venture for five years.
Additional land not currently used for brick manufacturing operations at Bringelly (Boral-owned) and Horsley Park and Oxley (both CSR owned) will be excluded from the transaction and retained for development by the respective shareholders. All other sites will transfer to the joint venture.
Boral has Gilbert + Tobin advising it on the merger which has not been formally communicated to the Australian Competition and Consumer Commission (ACCC). Currently there is no timeline on the deal clearance. UBS analyst David Leitch said he believed Boral would have been better served exiting the industry altogether.
Competitor supports merger
In a twist, direct market competitor Brickworks has sided with CSR and Boral, with Brickworks CEO Lindsay Partridge publicly urging the ACCC to support the merger.
It appears as if Brickworks has the most to gain if either CSR or Boral was to withdraw from the market, given it is the market leader on the east coast and has a brick monopoly in Tasmania.
Normally, if a competitor endorses a deal which makes its competition better, the regulator would wonder why and suspect a duopoly, which would not help consumers. This could prompt the ACCC to scuttle the deal.
Either way, some industry experts believe Brickworks is being mischievous. The Australian?s John Durie implied that Partridge has ?perversely? done his best to block the merger precisely by arguing in its favour.
Partridge said that like the car industry, if one brickworks producer goes then they all will because it is a lot harder and more expensive to get supplies. ?The industry in Australia supports some 2500 bricklayers, which is more than one company could support,? he said.
Sources: The Australian, The Herald Sun, Boral, Sydney Morning Herald, CSR