On November the 21st 2016 Boral (ASX:BLD) indicated that it was purchasing the Headwaters corporation. A US company at a premium of 21% over their share price. To fund this they began a rights issue this week. While Boral was trading at around $6.15 prior to this, the right issue was at $4.80.
A trading halt was initiated, it reopened at $5. It has moved in the $4.99 to $5.1 range.
I made the decision to exit from the trade BLDZ18 at a price of $1.05, this was slightly under the odds it was worth, but the price was moving north at the time. The options were purchased on the 18th of October for $ 0.43. With a minor adjustment in which the original strike price of $6 (contract size 100) was adjusted to $5.87 and a contract size of 102 securities.
A tidy profit. There could be further downward movement between now and when the option expires (28th of September 2017), but there is significant lack of surety there. Especially given the "Trump rally", which I suspect will eventually run out of steam(at least on the ASX)
Borals move to move into the US market is fraught with danger, Mr Trump among them. This is true for all acquisitions of course. But in particular the fact that they are partially heavily focused on fly ash. A coal oriented commodity which is likely to become less available at low costs in the mid to long term, since it is a byproduct of coal which is on the way out even without an awareness of global warming(gas production has at least a decade more demand to go than gasoline(ie crude), which has at least a decade left itself). However, on the basis of a buoyant US housing market, Headwaters can be a potential source of income growth over the next few years (or at least it will be a consistent source of income, which I'll get to in a second)
The question of course if why is Boral doing this? And why fund it this way? There are of course complications between an Australian company buying a US one. Minor stockholders become a large hassle to deal with, along with the vagaries of US shareholder law. But at it's core I believe that the income from a non Australian source is an excellent choice by Boral. Both Boral and CSR have put heavy investment into diversifying their income base. And Boral took a major hit to do it. I thinking that it's not the best thing for the Shareholders in a short term (<1 year, ie the idiots time horizon) but potentially quite a solid upside in the medium to long term (5 years)
Put simply, Australia is out of housing growth this cycle. The US is not. I purchased puts in Boral because I believed that they would be the first to feel pain from a downturn in the Australian housing market, given their strong exposure. Between now and then we've had a US election and bond rates have risen.
I do not strongly suspect that Mr Trump will in fact act as he has claimed. I believe his policies will be functionally hostile to the poor and middle class. This is different from Mrs Clinton, who was simply indifferent (which allows those hostile to do what they want) to them, until political forces within her party forced her to make some minor changes. Either way, the negative effects of this hostility will take a number of years to rattle out and Boral will make plenty of money on the way during the gradual downfall of the modern west. It will probably balance out a major Australian downturn.
One real possibility is that if Mrs Yellen leaves the Federal Reserve in 2018 (a very real possibility given she serves as chair with renewal at the discretion of the sitting president), Mr Trump will appoint a "pet" fed chair of the Arthur Burns variety(Mr Nixon's Fed chair, a fellow who is the reason there is the word "stagflation"). One who will bow to Political pressure, which is always to keep Fed rates low(or at least low in election years). Whether this simple leads to a decoupling of the fed rate from the bond market remains to be seen.
This will be bad for Boral, but bad in a multi-year, decade long cycle. I suspect they will fall, but the poor policy I saw before within the company(a focus on the Australian housing market) has been reduced.
As for the long term strength of the US market. I will leave with a quote about Mr Burns that was good enough to grace his wikipedia page.
"The only alternative is that he was under irresistible political
pressure from Nixon and had no choice. Neither explanation is very
favorable to Burns. Economists now recognize the Nixon era as Exhibit A
in how the adoption of bad economic policies in pursuit of short-term
political gain eventually turns out to be bad politics as well"
Good luck Boral. My profit in less than 2 months was 244%.
This Blog does not give or pretend to give financial advice. Go find someone who knows what they're doing for that.
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