Good morning, and thank you for your interest in the proposed merger of Soul Pattinson and Brickworks announced today. My name is David Baxby. I'm the lead independent director for Soul Pattinson. I'm joined by Deborah Page, the lead independent director for Brickworks, in making these opening remarks before handing over to the Soul Pattinson CEO, Todd Barlow, and Brickworks CEO, Mark Ellenor, to take you through the details of the proposed merger. This is an exciting day for both Soul Pattinson and Brickworks as we announce the potential merger of our businesses, which have evolved considerably over the last few decades in support of the creation of long-term value for both sets of shareholders. We believe the time is right to bring our portfolios under one investment company to create a leading diversified investment house of real scale with a simplified company structure and more liquidity.
I'll now hand over to Deborah to say a few words.
Thank you, David. I'm pleased to be here today on behalf of the independent board committee of Brickworks, which we established some time ago to ensure appropriate governance arrangements given the cross-shareholding between our companies. The independent directors of our respective companies have, alongside management, invested a significant amount of time to get us where we are today with this merger proposal to create a new AUD 14 billion ASX-listed entity. The proposed merger is unanimously recommended by the independent directors of Brickworks and the Soul Pattinson board, each in the absence of a superior proposal and subject to customary separate independent experts concluding and continuing to conclude that the merger is in the best interests of both Brickworks shareholders and Soul Pattinson shareholders. I'll now hand over to Soul Pattinson CEO, Todd Barlow.
Thanks, Deborah, and good morning, everyone. Marc and I will take you through the presentation, and we are joined by our respective CFOs, David Greben and Grant Douglas, who are available for Q&A. Today is the culmination of a lot of work on both sides over many years to find an effective way to simplify the company structure and generate positive benefits to both sets of shareholders. Soul Pattinson and Brickworks have this morning agreed to a merger, which will be effected by each company being acquired by a newly capitalized ASX-listed holding company, Topco, via interconditional schemes of arrangement. This will remove the current cross-shareholding, which has been in place since 1969. It simplifies the corporate structure and, in turn, supports more shareholder liquidity and a significantly expanded free float.
Topco will be more diversified across asset classes and continue to have a strong balance sheet and financial flexibility to pursue new growth opportunities. Topco would be governed by one board led by Robert Milner as Chair and one exec team led by myself as CEO. Topco would have a market cap of approximately AUD 14 billion and, following completion, will be renamed Washington H. Soul Pattinson and trade with our existing ticker SOL. Importantly, the governance, management, and investment philosophy will remain the same. It is extremely important that we adhere to the same processes and disciplines that have been creating enduring success for our shareholders for many decades. As we illustrated on the previous slide, Topco has been established to acquire both Soul Pattinson and Brickworks, which will be effected by two separate but interconditional schemes of arrangement.
The merger ratio is for Soul Pattinson shareholders to receive one Topco share for every one Soul Pattinson share currently held or at the record date. Brickworks shareholders would receive 0.82 Topco shares for every one Brickworks share held at the record date. Based on the merger ratio and Soul Pattinson's last closing price of AUD 36.93 on the 30th of May, which was last Friday, the implied offer value represents an attractive premium to Brickworks shareholders, which is 10.1% to the closing price of Brickworks shares being AUD 27.51 on 30 May, an 11.9% premium to the one-month VWAP, 21.9% premium to the three-month VWAP, and when applied to the post-tax net asset value of Brickworks shares, the premium is 16.6%.
It's worth providing context here that Soul Pattinson currently contributes the majority of the value of an existing Brickworks investment, which makes the premia even more significant when applied to Brickworks non-Soul assets. On a pro forma basis, the combined group would have a net asset value of AUD 13.1 billion, a market capitalisation of AUD 14 billion, and a free float of some AUD 12.6 billion. The proposed merger will remove approximately 148 million shares currently cross-held between Soul Pattinson and Brickworks and eliminate the cross-holding. At scheme completion, Topco will be capitalised by the issuance of at least 34 million new Topco shares, and today Topco has received commitments for AUD 550 million of Topco shares. Those shares will be issued at no discount to the prevailing Soul Pattinson share price and will only be issued if the scheme is implemented.
Soul Pattinson and Brickworks retail shareholders were not able to participate directly in this equity raise as it relates to the formation of a new entity that is not yet listed and is contingent on a future scheme being implemented. This is a unique transaction, but one that shareholders have our firm commitment that this proposal has been structured to preserve and create value for all shareholders. It is expected that remaining Topco shares will be allocated, firstly, to satisfy the demand created through a repurchase of any of Soul Pattinson's existing AUD 450 million of convertible bonds, and then to enable a global investment bank to use Topco shares as a hedge to satisfy the demand for a potential new security exchangeable into Topco shares.
What this all means is that, other than what is noted and described above, it will not be necessary for the scheme implementation that there be any other share issuances to the investor community. The merged entity will be well capitalized and, despite significant share cancellation, will continue to be a large, liquid ASX-listed company. I reiterate that we firmly believe that there is potential significant upside for all shareholders as part of the merged group, as we continue to outline in this presentation. Upon implementation of the proposed merger, Topco would be governed by one board of eight directors and one executive team led by myself as CEO and Rob Milner as Chair. The transaction is unanimously recommended by the directors of Soul Pattinson led by David Baxby as our Lead Independent and by the independent directors of Brickworks led by Deborah Page.
Their recommendation is subject to customary conditions, including the two independent experts each opining that this is in the best interests of the recent set of shareholders. Importantly, Soul Pattinson intends to pay a final FY2025 dividend in the ordinary course, and Brickworks intends to pay a dividend equal to the merger ratio per share applied to the Soul dividend. Key conditions include approval by both Soul Pattinson and Brickworks shareholders via relevant schemes of arrangement and the findings of the independent experts. The schemes are also conditional on the Australian Taxation Office confirming it is prepared to issue class rulings for shareholders, including script-for-script rollover relief and a binding ruling for Topco. We expect scheme booklets to be dispatched to shareholders with respective scheme meetings to be held in the second half of this calendar year, with further updates to be provided.
I'll now expand on the strategy in more detail, including how Topco creates a cleaner company structure that will be supported by a well-balanced portfolio. Currently, Soul Pattinson owns 43% of Brickworks, and Brickworks owns 26% of Soul Pattinson. This cross-holding is the last of its kind and requires a unique approach. The future combined group, as illustrated on the right, would be 72% owned by existing Soul Pattinson shareholders. Existing Brickworks shareholders would own 19%, and new Topco shareholders will own 9%. This is an approximate ownership and depends on the final corporate structure. Topco will operate as Soul Pattinson, but with a cleaner, simpler structure, and we expect it to be a more investable company as a result. This slide shows the proposed Topco structure and how investors will gain exposure to a well-diversified portfolio currently worth over AUD 13 billion in net asset value.
On the left, we have Soul Pattinson's strategic investments that house many of our long-term holdings and would remain the largest portfolio even after removing the current holding of Brickworks. The property portfolio would be upsized, housing the Industrial Trust Joint Venture and Manufacturing Trust Joint Ventures of Brickworks. Our private equity portfolio would house the Building Products division of Brickworks. Our large-caps credit and emerging companies portfolios will remain in place. Brickworks' management team will remain in place to manage the building products and property assets, and consistent with our approach in other private equity assets, we will establish a small subsidiary board to oversee the building products operations. This slide shows the enhanced shareholder liquidity we expect to see from the elimination of the cross-shareholding. On the top left, you can see the uplift in the pro forma market capitalisation to AUD 14 billion.
With the removal of the cross-holding, the pro forma free float adjusted market cap uplift is significant. Soul Pattinson's current free float will increase from AUD 8.4 billion- AUD 12.6 billion on a pro forma basis. The bottom graph illustrates the positive impact that this would have on Topco's relative position compared to peers. This illustrates why we believe we are creating a more investable company as a result of this merger, with significant potential upside for all shareholders in the combined group. Turning now to recap the strategic rationale for Soul Pattinson shareholders before I hand back to Marc to deliver his message for Brickworks shareholders. From Soul Pattinson's perspective, this is not just about simplifying the corporate structure.
It's also about generating strong financial returns for our shareholders and increasing our exposure to solid investments at the right time in the cycle where we can assist with long-term value creation. We believe the merger will be accretive to both pre- and post-tax NAV and net cash flow from investments on a per-share basis. The transaction will lead to significant rebalancing of Soul Pattinson's portfolio, including increased exposure to Brickworks' building products division, which is expected to benefit from the long-term undersupply of housing both here and in North America, as well as the enhanced exposure to Brickworks' high-quality industrial property assets with additional development opportunities. The increased allocation to property and private equity is a continuation of our strategic shift towards private markets that has been our focus since the Milton deal in 2021.
As I said earlier, financially, Topco will be in a strong position from day one, and we would have significant capacity to pursue new investment opportunities as they arise. I'll pass over to Mark to talk about the transaction from Brickworks' perspective.
Thanks, Todd. For Brickworks shareholders, we see strong logic and rationale in unwinding the cross-shareholding ownership structure. Based on the closing share price on the 30th of May and a merger ratio of 0.82, Brickworks shareholders will receive an implied value of AUD 30.28 per share. This represents a headline premium of 10.1% to Friday's closing share price and a one-month and three-month premium to the volume-weighted average price of 11.9% and 21.9%, respectively. Additionally, this represents a 16.6% premium to post-tax net asset value. There is a significant diversification story for our shareholders to benefit from, gaining direct exposure from Soul's diverse portfolio of assets spread across private equity, credit, and other growing asset classes, delivering cyclical protection and a strong cash flow generation profile.
The outperformance of Soul Pattinson over a number of years is a remarkable achievement that speaks to the significant diversification of its portfolio and the quality of its management team. Furthermore, the consistent and growing dividend story is also very attractive for our shareholders. Having been with Brickworks for 25 years, the ongoing success of the business is incredibly important to me. This slide gives a visual illustration of the premium offer for Brickworks shareholders, which is strong for a merger of this nature where both parties have a shareholding in each other. The current offer reflects a 16.6% premium to the post-tax NAV of AUD 25.97 per share. Taking into consideration the cross-shareholding, the offer represents a 57% premium to Brickworks' non-Soul assets. The proposed merger will deliver cash flow accretion on a per-share basis.
The Brickworks independent directors recommend the proposed merger, subject to the absence of a superior proposal emerging and the independent expert report, that this is in the best interests of shareholders. Turning to the next slide. Soul Pattinson's consistent and growing dividend story is also very attractive for our shareholders. This slide demonstrates the dividend and outperformance story that Brickworks shareholders will gain direct exposure to. Soul Pattinson has been able to demonstrate growing dividends over the past 24 years at a compound annual growth rate of 9.8%. The graph on the right shows the outperformance of Soul Pattinson against the All Ords Accumulation Index over the past 20 years, where investment in Soul Pattinson has returned three times the index. Turning now to the summary of key points announced today. What we have proposed is a transformational merger that mutually benefits both sets of shareholders.
This announcement marks the commencement of unwinding a cross-shareholding relationship that has been in place for the past 56 years. The cross-shareholding served as a very important purpose, not least of which has been the creation of significant long-term value for all our combined shareholders. However, we believe this is the right time, and this merger is the right pathway through which to simplify the corporate structure, support additional shareholder liquidity, and significantly expand the free float. Finally, we expect the scheme booklet, shareholder vote, and implementation will all take place in the second half of 2025. We will keep shareholders informed with new information as well as key dates. We will now take questions, starting with the analysts who are on the line. Thank you, Moderator.
Thank you. For the analyst participants, if you wish to ask a question via the phone, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. Your first question comes from Peter Steyn with Macquarie. Please go ahead.
Hi, Todd and Mark. Thank you very much for your time. Perhaps just a question around the sort of operational versus investment in terms of Soul Pattinson's merger at a high level. Todd, how would you think about the operation of the Brickworks assets as an example in the context of what has historically been a little bit more of a financial relationship with a lot of your operating businesses? Do you see any change in how Soul Pattinson goes to market on a go-forward basis in that context?
Yeah, thanks, Peter. I mean, I think this is really coming full circle for us because for those who know the history of Soul Pattinson, we've been private equity investors for a long time. And some of our biggest and most successful investments today, like New Hope and TPG as an example, started out as private equity investments. We have had operating businesses sitting inside the portfolio before, and then we floated those businesses and retained meaningful stakes. I guess we've always sort of maintained that close contact with the management teams and operators of those businesses. In the last four or five years, and particularly this accelerated after the Milton-Whitt merger, we've been building up a portfolio of private equity investments. At the half, that was about AUD 1.7 billion in value. There are four major investments inside that portfolio.
We have been developing a capability to be able to help those businesses focus on long-term value growth by giving them supportive capital partnership, as well as some governance about focusing on how you build long-term value rather than succumbing to short-termism. With Brickworks, that fits very neatly. I mean, particularly the building products business fits neatly inside that private equity portfolio. I think that Mark will continue to lead the management team to run that business. From most respects, it will stay exactly the same. No changes to brand names or customer relationships or really anything that the business does. We do think that sitting in a private environment and being able to make long-term investment decisions with access to capital will be additive to that business. Mark, did you want to add anything on it?
No, I think from an operational point, Peter, it's really business as usual. I mean, there'll be a subsidiary board that we'll set up. Malcolm Bundy from our board's coming across to the Soul's boards, and he's got deep manufacturing experience and will continue to guide us on our path. So we're just excited with the new merger, and I think we'll be able to really focus in on building products and maximising our returns as we come out of the bottom of the cycle.
Thanks, James. If I may sneak one other one in the context of this transaction, tax has generally been a bit of a challenge over the years. What confidence do you have that you get the rollover relief?
Yeah, I think the rulings that we're looking for are mechanical in their application of the existing laws. We have engaged with the ATO to ensure that there's no difference of opinion as to how those rules should be applied. We think it's pretty standard that rollover relief would be applicable in these circumstances. Of course, those rulings aren't forthcoming until completion, but we have a high level of confidence that they'll come.
Thanks, Todd. Appreciate it.
Your next question comes from Rohan Gallagher with Jarden Group. Please go ahead.
Yes, good morning, Todd. Good morning, Mark. Good morning, everybody. Thank you for taking my question. I'm just curious, the conglomerate discount has been involved in the stock for many years. I was just curious as to the timing as to why you're sort of crystallizing it now. In relation to that, does this new structure provide a precursor for stuff that you can do now that you previously could not do under the cross-shareholding structure, please?
I wouldn't say that the cross-shareholding has held us back in a material way. I mean, you can see from the trading activity that Soul's has engaged in, particularly post the Milton merger, in the last four years, we've been averaging about AUD 6 billion of annual buying and selling activity. There is plenty of liquidity inside our portfolio. I think we've very much established ourselves as an investment company rather than a conglomerate. I don't think we have been suffering from that sort of traditional conglomerate discount that others may face. That is not the case with Brickworks. I think the Brickworks business has been trading under its fair value for some time. I guess that was one of the reasons why we wanted to think about doing a transaction like this.
It also, from a timing perspective, works nicely with us because we have been building that exposure to private markets in Soul Pattinson over the last four years. It now is appropriate for us to hold the building products assets and property assets inside those portfolios that we have been developing.
Just an extension to that, Todd, does that mean that you could actually be in a better place now to pursue growth within the private market segment for building and property?
I mean, I absolutely think that that's the case. I think that that is the benefit of our private equity assets is that we can provide capital for growth opportunities. In public equity land, you have to match up your acquisition with your capital raise or your source of funding. That can be sometimes challenging to do. Whereas in our case, we've got so much liquidity across the group that we can just fund acquisitions and growth opportunities as and when we see them.
Thanks, Todd. Appreciate that. Have a good day.
Once again, if you wish to ask a question on the phone, please press star one on your telephone. Your next question comes from Suraj Nebhani with Citigroup. Please go ahead.
Hi, morning. Thanks for the opportunity. Just one question and maybe keen to hear from both the Soul and Brickworks perspective as well. Just the timing of this deal and I guess why now? Yeah, I'm keen to understand if there's any other future potential deals that you see yourself as being better suited by being in the structure.
Yeah, thanks. I'll talk first from sort of Brickworks perspective. I mean, we sort of look at the cross-shareholding from time to time over the years. It's nothing new that we reviewed it this time. Being able to work up a deal with Soul's that benefits both shareholders and really over the years, we've been involved in that for a long period of time. We haven't been able to come up with a deal that equally rewards both shareholders and drives the long-term value. I think in this process, we've been able to come up with the offer that we've presented today. I mean, the Brickworks business in particular has grown a lot over 20 years, but the last 10 years in particular with the emergence of our significant property portfolio and also the growth in the investments following the Soul's business.
We're not just the brickmakers we were at the sort of turn of the century. This longer-term shareholding, cross-shareholding has done us well through that time. Also, we just believe that the Soul's will provide us additional support of capital, as Todd mentioned before. We know we're at the bottom of the cycle in both countries. We've invested quite heavily over the last decade as well, and it'll put us in a really strong position to take advantage of the uplift over the medium term. In conjunction with that, our IBC has met regularly over that time period and taken Robert Milner and Todd Barlow out of the Brickworks board for those particular meetings. They unanimously support this at this time.
From Soul's perspective, I do not think I can add too much to that. Other than to say this has been on the agenda on and off for over a decade. Both sides, I know, have always looked at ways that we can deliver value to shareholders. It is not easy to achieve that because it is a unique structure. There are lots of moving parts, lots of complexities. We wanted to make sure that we could deliver an outcome that benefited both shareholders.
Thank you.
Your next question comes from James Casey with Ord Minnett. Please go ahead.
Good morning. I had a question with regards to the equity issue. I just wonder if you could clarify the Brickworks current debt, the value of the Soul's convertible bond, and then the transaction costs. I'm sure they're probably in the fine print somewhere. If you could clarify those numbers, that'd be great.
The current—Grant, do you want to take the bit about the Brickworks current debt?
Current debt?
Yeah. I mean, we've referenced the January debt numbers, which was our last reported debt at AUD 721 million net debt. That's the level that we've sort of referenced in the documents. With the equity raise, taking into account all of the group debt, including Brickworks debt as well as Soul Pattinson's convertible bond, and the new issuance of 34 million shares by Topco will leave the merged entity in a net cash position.
Right. Okay. And the transaction costs?
I don't think they're finalized, but there is stamp duty, which is something in the order of AUD 200 million.
Yeah, it's about 250 all over.
Okay. Just the at least comment, just the at least 34 million shares, why at least?
I think it depends on a few things. Particularly, given the back-end nature of us dealing with our current convertible bond. With the transaction happening, our convertible bond will be most likely redeemed. Of course, that is subject to convertible bond holders and the share price at the time. We will also look at if we were to redeem that convertible bond, issuing a new instrument that will be exchangeable into Topco shares. Something that is similar in nature to the convertible bond that will be redeemed. That will be subject to investor demand at the time. In terms of the straight equity issuance, other than the AUD 550 million of demand that we received today, there will be no further equity issuance.
Okay. Okay. Thanks, Todd.
There are no further questions from the analysts on the line at this time. I'll now hand back to Courtney Howe for any written questions on the webcast.
Thank you, moderator. We do have a number of questions that have come through via the webcast, but I'd first like to apologize for exceeding the maximum viewership of today's webcast. There will be a recording available on Soul Pattinson's website and Brickworks' website. We will send that link around to anyone that inquires and make it publicly available. Please feel free to inbound the info@soulpattinson.com.au email if you have a question that was not adequately addressed. Now turning to some of the written questions that have come through, I will start by throwing this to you, David Baxby, as it relates to governance. Does the appointment of only one of the four Brickworks independent directors to the proposed Topco board suggest that this is more of a takeover than a merger? How was board composition determined?
Thank you for the question, Courtney. Look, the board composition was something that was given very serious consideration. We go through a fairly rigorous annual process where we've got a skills matrix that's been laid out and refined over many years. We have gone through some recent board renewal. I was obviously the benefit of one of the pieces of renewal. As we considered the extent of the portfolio and the addition of the incremental expertise that we needed, primarily focused on manufacturing and primarily focused on building products, we felt that it was appropriate to add an incremental director, being Mal. He brings an enormous range of experience in the skills that we need.
We therefore feel that as we then consider that in whole, that the board on a go-forward basis will have the appropriate mix of skills and experience to manage the overall portfolio.
Thank you, David. Next question, I'll throw this to you, Todd. When Soul Pattinson bought Milton, there was a significant sell-down of shares for capital to be directed into private equity and private credit, etc. Does Soul Pattinson similarly intend to sell down Brickworks' assets or keep them as is and build on their quality assets? Will it affect the Brickworks joint venture with Goodman?
Yeah, the short answer is no. As I said earlier, the property assets and building product assets fit perfectly into that strategy that we've been adopting to increase our exposure to private markets. When we took the public equities in the Milton transaction, we utilized some of those public equities to rebalance the portfolio and use that as a liquidity pool for this move into more private assets. In this case, what we're inheriting through this merger are private assets, which fit very comfortably with our current strategy.
Thank you, Todd. Next question is, how come retail shareholders have been excluded from the capital raising?
The short answer is that it's not something that's capable of being taken up by retail shareholders. This is an issuance by Topco, which currently is not listed and only becomes listed on completion. It is a capital raise that is conditional on completion actually happening. With that in mind, we were very conscious about ensuring that that capital raise wasn't done at a discount and therefore dilutionary to our existing shareholders. You'll see that that placement was again conducted at zero discount to close. Our view is that the transaction overall is very accretive to shareholders, and our shareholders will be looked after.
Thank you. There are a number of different questions coming through about the ATO and tax implications. I might just ask you, Todd, if you can discuss at a high level why the ATO approvals are required.
It is customary in deals of this nature that you do get a ruling from the ATO that script for script rollover relief will be available to both sets of shareholders. That means that there is not a crystallization of or a capital gains tax event on the acquisition by Topco. Whatever a shareholder's tax cost base is today will be carried through into the future. That is a pretty standard set of rulings that need to be applied for and granted. Topco will also apply for some rulings around how to treat the assets that are being acquired by Topco.
Thank you. A further question now. S&P does not include LICs in its various indexes. Given this deal involves Soul Pattinson pivoting towards brick manufacturing. Sorry, I've just lost that question. Let me find that. Okay. Given this deal involves Soul Pattinson pivoting towards brick manufacturing and property, will the LIC component be downgraded going forward, particularly given the pivot to private markets?
Soul Pattinson has never been an LIC in the definition of listed investment company that I think you're referring to. For that reason, because we're an investment house with some operating assets, with some concentrated investments across large listed companies, the diversity of what we do does not fit into a traditional LIC criteria. In that regard, S&P has always considered us a company and included us in the various indices.
Thank you. Next question. Am I correct in understanding that the intention is to move to zero debt for Topco? If so, given the track record that Soul has had in delivering a positive return on borrowed money, is it not conservative use of debt? Is not conservative use of debt appropriate in achieving better returns for shareholders?
Yeah, thank you. I mean, we do employ, I mean, most of our investments have an appropriate level of corporate debt. Our view is that if we were to employ lots of gearing at the Holdco or Topco level, then it is sort of gearing on gearing. Now, of course, with our track record and with the investment returns that have been available, that would have been additive. From a risk perspective, our view is that we have always been lightly geared. I think there is also a view on the cycle as well. Our view is that the right time to be geared is when things are really cheap, and the right time to have cash is when the market looks expensive. Certainly, post this transaction, we will be net cash.
Thank you. The next question is around cost synergies and what we can expect from the merged entity as there will be a reduction in duplicate costs over time.
Yeah, I don't think that that's a meaningful driver for the transaction. I mean, there will be some savings. Obviously, you don't have to pay two sets of listing costs. Given that we're going to keep the existing management teams and operations in place and it's business as usual, synergies are not a major driver for the transaction uplifts and values that we're creating.
That's all we have for questions via the webcast. I will just repeat that there will be a recording of this presentation available on our website shortly within the next couple of hours. With that, I'll hand back to you, Todd, for closing remarks.
Thank you everybody for joining. I apologize to the people who were not able to make it because we did get inundated with people joining the call today. That is great that there is so much interest in this transaction and in our business. It is extremely exciting times for both of our businesses. I think that we are proud of the fact that we have been able to engineer a merger where we can say that both of our shareholders are going to do very well out of the transaction. We look forward to continuing to update the market as we progress the transaction over the next several months. Thank you again for your interest today.