The Aussie Buffett strikes again: Soul Patts seals $14b deal with Brickworks

One of the intriguing questions for Australian investors is whether there are any local companies whose performance compares with famous offshore names such as Warren Buffett’s Berkshire Hathaway.

It turns out we have quite a few of them, although not many are as closely tied to the identity of a single famous investor, which is why they are perhaps not as well-known as Berkshire Hathaway.

Soul Patts comes out with winning deal

One particularly juicy example is in the news at the moment thanks to a deal that combines great timing and ingenuity to come out a winner.

I’m speaking about Washington H Soul Pattinson (ASX: SOL) – better known now as Soul Patts – which has been an investment powerhouse for more than a century and recently announced a $14 billion merger with Brickworks (ASX: BKW)

Companies locked together for 56 years

The two companies have been effectively cemented together for 56 years through cross shareholdings that helped to stave off takeovers but by combining and cancelling out their cross shareholdings, they will release a significant amount of previously locked up shareholder value and directly increase earnings per share.

While the cross shareholding has long been controversial and has led to several attempts by agitating investors to unwind the arrangement, the timing of the merger now is particularly fortuitous on a number of levels.

Amazing investment track record

Soul Patts has an extraordinary investment track record over the past 25 years, having produced returns of 2055% against a much smaller 682% gain on the All Ordinaries accumulation index.

It has also always paid a dividend and has a history of raising dividend payments over time.

That is well within the Buffett ballpark and there could be a lot more to come once the Brickworks assets are combined with Soul Patts and some interesting synergies are unlocked.

Building materials to help with housing backlog

For a start there is the Brickworks building materials business which will directly leverage the group to Australia’s big backlog of new home construction through supplying bricks, tiles, cement and plasterboard.

Australia has strong unmet demand for new home construction, which bodes well for companies that supply building materials.

There has already been a lot of consolidation in this sector over the past few years with the once publicly listed Boral, CSR and cement maker Adbri all taken private after multi-billion dollar buyouts by local and offshore companies.

France’s Saint-Gobain bought CSR for $4.3 billion, Ireland’s CRH bought Adbri (formerly Adelaide Brighton Cement) for $2.1 billion and the billionaire Stokes family took over Boral for $1.9 billion.

That will leave Soul Patts as one of the few ways an Australian shareholder can invest in a local building materials supplier, albeit as part of a much larger group.

Property exposure a key attraction

The second string to the bow for this merger is the unparalleled exposure it gives to commercial property.

Brickworks also contains a very large industrial and commercial property portfolio worth around $4 billion in total, which will see Soul Patt’s direct exposure to property as an asset class go from 1.7% to 19%.

According to Soul Patt’s CEO Todd Barlow, that property exposure is just about ideal for the average Australian investor.

He sees Soul Patts as a sort of large, listed family office which gives investors a chance to be exposed to listed equities, private equity, private credit, strategic investments and private capital, with the greater property exposure filling a gap in the portfolio.

Just like a family office, he sees the role of Soul Patts as being to get outsized returns by diversifying across various asset classes and reducing risk.

Investors bidding up both companies

Certainly, the share market has loved the concept of the merger, bidding up the share prices of both companies as investors get their head around the unlocked value and investment synergies.

While there is no Warren Buffett behind Soul Patts, the Millner family have always been heavily involved in both companies and will emerge with around 7 to 8% of the enlarged company.

Robert Millner has been the long-time chair of the Soul Patts board and is likely to continue in the combined company.