WSJ BLOG/Deal Journal Australia: Brambles May Hold Onto Recall: BofA

(This story has been posted on The Wall Street Journal Online's Deal Journal Australia blog at http://blogs.wsj.com/dealjournalaustralia/)

By Gillian Tan

Bank of America Merrill Lynch may be advising Brambles on the sale of Recall, alongside UBS, but its analysts reckon there's an increasing likelihood the company will hold onto that asset for now, choosing instead to revisit a sale at a later date.

In a note to clients, BofA Merrill Lynch analyst Matthew Spence said the 7.5% decline in the S&P/ASX 200 in the month to date, and the fact U.S. high-yield debt markets have dried up temporarily, make it hard to see a sale of the document management business being completed in the near-term.

"Given the uncomplicated nature of the business, we think a sale could be revisited at a later date," Mr. Spence said.

"In our view the most significant potential consequences of that could be no up to A$500 million buyback, a paring back of capital expenditure to be directed to IFCO and the likely introduction of a dividend reinvestment plan to incrementally pay down debt," Mr. Spence said.

He added that the sale of Recall would have reduced concern around Brambles' BBB+ credit rating and the fact that its gearing is currently 2.2 times, above its target ratio of 1.75 times.

BofA Merrill Lynch reckons Brambles may consider underwriting two consecutive dividend reinvestment plans to fund the de-gearing, and estimates the company could pay dividends of 14 cents a share in the first half of fiscal 2013 and 16 cents a share in the second half.

"Underwriting both dividends could raise around A$450 million, which in our view would adequately cover the debt pay down requirements," he said.

Brambles fell 2.7% on Wednesday following remarks that it was unable to announce the outcome of a sales process for Recall within the previously announced timeframe, but that it remained in discussions with parties interested in buying the business.

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-By Gillian Tan, of The Wall Street Journal; [phone]; [e-mail]