2007-03-06 Brambles Limited : IFCO - Threat or Opportunity?

IFCO could be a strategic threat to CHEP

Although IFCO only operates a pallet sale model, it controls 12% of all pallet issues in the US, well ahead of the next largest at 1%. Further, its unique nationwide infrastructure of service centres and existing relationships with CHEP's customers and retailers represent the ideal beachhead for a new pallet pooling entrant.

...and also an opportunity

We believe acquiring IFCO would offer Brambles material operational synergies in US pallets, give its European RPC business scale, and remove the threat of a new entrant. Now may also be an ideal opportunity given Brambles' lazy balance sheet and the US Immigration and Customns Enforcement investigation of IFCO.

Acquisition by Brambles could make financial sense

Acquiring IFCO for US$1bn would be EPS accretive to Brambles and help gear its balance sheet, but would inevitably dilute its ROIC in FY08 from 32% to 27%. The financial benefits of a deal would largely depend on pricing discussions with Apax private equity, which controls 89% of IFCO, and would crystallise a c.60% IRR on our assumptions.

Valuation: A$14.60 using DCF

Our DCF based valuation is A$14.60 and we have a A$15.50 price target based on a 12-month forward dated DCF. Brambles is currently trading at a 5% premium to the All Industrials average OpFCF multiple.