Brambles (BXB) Update

Submitted by Jim Thesiger on 20 May, 2008 - 17:08

Brambles (BXB) has a price target of $10.00 from Australian stock analyst UBS.

Brambles (BXB) Re-visiting IFCO

A combined entity looks increasingly compelling:

This analyst has previously explored the scenario of Brambles acquiring IFCO. We re-visit the issue in this report given Wal-Mart's recent move to exert more control over the flows of whitewood pallets, CHEP's diminishing significance in the European re-usable crate (RPC) industry, and Brambles' more aggressive approach to growth. The overlaps between the two businesses appear compelling - IFCO controls 8% of all 48x40 (GMA) pallet issues in the USA, and is the market leader in European RPCs.

We think a transaction makes sense for a number of reasons::

1. Both together control 40% of all timber GMA pallet issues in the USA.

2. Buying IFCO would eliminate the only other national pallet network.

3. Consolidation in European RPCs is needed (both have a combined 58% share).

4. There are likely to be material operational synergies in both the USA and Europe.

Price, competition clearance, and ICE investigation are obstacles:

IFCO's current enterprise value is US$0.8bn, implying 12x trailing EBIT. Agreement would be needed from its 89% owner, Apax Private Equity, which could be open to an exit after 4 years and c.30% ungeared IRR. We see two major hurdles to a transaction: 1) Competition clearance in the US and the EU given the combined market shares, and 2) Isolating any liability from the US Immigration and Customs Enforcement (ICE) investigation into IFCO's activities.

Valuation / Price target A$10.00

Our DCF valuation and price target are unchanged at A$10.00.