Where next for Brambles shares after CVC Capital Partners ends talks?

Brambles (ASX: BXB) shares have experienced rollercoaster volatility over the past year. The pallets, crates, and containers manufacturer saw its 2021 share price peak at $12.49 at the start of September, before falling by 26% to $9.26 in February.

However, after recovering ground, the ASX 200 stock has remained largely flat, up 0.85% for the year.

But takeover speculation has put a spanner in the works.

Bramble share price: buyout speculation

Monday saw Brambles shares fly by 13.3 % to a high of $11.82, as it confirmed rumours that private equity giant CVC Capital Partners was in takeover talks for the specialist. The Australian reported that CVC was considering bidding circa $20 billion for the company, a standard premium of roughly 30%.

The Brambles board confirmed ‘preliminary engagement with CVC in regard to an unsolicited proposal to acquire all of the shares in Brambles.’ However, it noted ‘the engagement is preliminary, incomplete and there has been no formal proposal… there is no certainty that the engagement will lead to a binding proposal.’

The board highlighted that it remained ‘focused on implementing the Shaping our Future transformation plan…to transform the business and unlock value for customers and shareholders.’ It further informed that it was ‘also considering other strategic options for the Company that maximise shareholder value.’

However, Tuesday sent Brambles shares into reverse, as the company counselled ‘CVC has today advised that it will not be putting forward a proposal nor seeking to conduct detailed due diligence at this time.’ Blaming ‘current external market volatility,’ the board told investors ‘the engagement has therefore concluded earlier today.’

Brambles shares have so far fallen back to $10.72, slightly above their prior value. However, this may not be the end of the takeover story.

Where next for Brambles shares?

Had the buyout gone through, it would have been one of the largest private equity takeovers in Australian stock market history.

With growth stocks crashing globally, these talks have highlighted the cash search for quality companies operating in strong defensive sectors as the spectre of a global recession looms.

But CVC’s concerns over market volatility are fair, as Russia’s invasion of Ukraine, the resurgent pandemic in China, and tightening monetary policies worldwide conspire to create continued uncertainty. And when CVC last invested in Australia, it lost $1.8 billion on its investment in Nine Entertainment in 2012.

But Brambles is a key beneficiary of both heightened e-commerce activity and the supply crunch in container availability. Counting retail titans Walmart and Costco amongst its customer base, its CHEP brand is an invisible hand in the global supply chain, operating from a network of 750 service centres in over 60 countries.

Accordingly, sales have risen by 8% in the first nine months of this fiscal year. CEO Graham Chipchase enthuses that strong ‘sales performance in the third quarter was driven by pricing actions in response to operating cost inflation, pallet scarcity and increased pallet costs driven by extraordinary lumber inflation.’

Despite elevated expenses, it expects revenue to increase between 8 and 9%, profit to go up by 6 to 7%, and underlying profit growth to rise by 11 to 12% (excluding transformation costs) in FY22.

Further, Brambles is only $120 million short of completing its $2.4 billion share buyback programme. And after demonstrating success in its US automation and sawmill investments, the company is currently progressing its global automation programme which could strengthen its competitive advantage.

Credit Suisse analyst Paul Butler believes the potential $20 billion bid implied a valuation of $11.57 a share, but ‘this does not take full account of the strong earnings growth that we expect over the next two years…fair value could be $15.20 per share.’

Meanwhile, UBS analysts Andre Fromyhr and Krasni Shrivastava argue ‘our fundamental valuation remains higher still (A$21.6b) without a control premium and without value attributed to the potential US plastic investment.’

It’s possible that the board viewed CVC’s bid as a fundamental undervaluation of the business’s future potential.

And while a future bidding war remains speculation for now, CVC’s approach has put Brambles’ market strength on the radar of every group with cash to burn.

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