Investigation into James Hardie and Soul Patts deals

In recent months, we have witnessed significant acquisitions in the ASX building products sector involving companies like James Hardie and Soul Patts. While the James Hardie-AZEK and Soul Patts-Brickworks deals seem similar on the surface, the market’s response to them couldn’t have been more different.

When Soul Patts announced its merger with Brickworks, its shares saw a 16% surge, and Brickworks’ shares shot up almost 25% on the same day. On the contrary, James Hardie faced a downturn, losing a quarter of its market cap when it revealed its plans to acquire AZEK, a US-based decking manufacturer.

Looking closely at these deals, it seems that beyond valuation considerations, governance issues play a crucial role in shaping the market’s response. The way companies communicate with shareholders and exercise judgment in capital allocation can significantly impact investor sentiment.

James Hardie’s acquisition of AZEK, valued at around USD 7 billion, raised eyebrows due to its hefty price tag and governance red flags. The company secured a waiver from shareholder voting rules, drawing criticism for lack of shareholder oversight. Additionally, shifting its primary listing to New York led to concerns about potential delisting from Australian boards, denting trust in the company.

On the other hand, Soul Patts’ acquisition of Brickworks was seen as fixing a long-standing governance flaw. The merger collapsed a decades-old cross-shareholding arrangement, improving liquidity and opening up opportunities for the merged entity to attract passive funds. Soul Patts opportunistically used its premium-rated shares to acquire Brickworks at a discount, benefiting from a valuation arbitrage.

The market’s positive reaction to the Soul Patts-Brickworks deal underscores the value of good governance. Although the deal may not have been the most appealing from a pure valuation perspective, the resolution of governance issues seemed to outweigh concerns, leading to a favorable market response.

Ultimately, the divergent outcomes of these two deals shed light on the importance of governance in shaping investor perceptions. While James Hardie’s venture with AZEK faced criticism for governance missteps, Soul Patts’ move with Brickworks was lauded for addressing long-standing structural issues. Governance matters in the eyes of investors, and the market is quick to reward or punish companies based on their approach to governance.