Meet TopCo: A new company to be born from the $14bn merger of Brickworks and Soul Pattinson

Investors have just heard about TopCo, a company being born from $14bn merger of Brickworks (ASX:BKW) and Washington H. Soul Pattinson (ASX:SOL). For now the combined ASX company will be called TopCo but will eventually adopt the latter’s name.

A combination of the two seemed inevitable for many years, given their close affiliation – the former is a substantial shareholder in the latter. But only now has the inevitability become a reality.

TopCo: Born from a merger of Australia’s largest brick company and our home-grown Berkshire Hathaway

Let’s recap both companies first. Brickworks is Australia’s largest brickmaker, capped at over $4bn. It has a track record of long-term returns, having maintained or increased dividends for 48 straight years and made a Total Shareholder Return of 11.7% per annum for 25 years up to FY25.

It has been enduring difficult time of late due to the departure of Lindsay Partridge who was with the company for 39 years, 25 of which were as CEO, not to mention high costs, red tape and labour worries in the construction sector.

Meanwhile, Soul Pattinson is an investment company owning stakes in several businesses, most notably Brickworks (ASX: BKW) with a stake of over 40%. In its most recent results, it recorded a pre-tax Net Asset Value of $11.8bn, which was 8.7% up in 12 months.

Since 2000, it has increased dividends by a 9.6% CAGR and has lifted dividends for 24 consecutive years. One more year and it becomes a Dividend Aristocrat! It has also reported paying dividends for 121 years, even through the worst wars and economic downturns of the past century.

Two becoming one

The combination will create a new $14bn company. Both companies endorsed the deal. CEO of Soul Pattinson Todd Barlow said it just made sense declaring,’ It simplifies the structure, adds scale, and creates a more investible company…We believe the combined business will be very well diversified and in an even stronger position to deliver enduring value for all share holders’.

Brickworks CEO Mark Ellenor said,’ The time is now right to combine with Soul Patts, bring our portfolios under one investment company, and become a well-resourced and more diversified group delivering long term value for our shareholders’.

Obviously, given the large cross-shareholding, there is a question of conflict of interest. And so only members of Brickworks’ Independent Board Committee considered the merger and other directors excluded themselves from such discussions. Moreover, the companies will refrain from voting when a vote is held, as either could sway it one way or the other.

There is no firm date for when a vote will be held, except that it will be in the second half of 2025.

What is in it for everyone?

Soul Pattinson investors will get 1 share for each share owned while Brickworks will only get 0.82 each. But considering the price paid, it is $30.28 per BKW share and this is a 21.9% premium to the 3-month VWAP of Brickworks shares.

Soul Pattinson investors will have 72% of TopCo, while Brickworks shareholders will have 19% and the balance will be from investors providing new capital. TopCo will be capitalised with new equity of at least $1.25bn, subject to the deal being completed. As we noted, the company will adopt Soul Pattinson’s name once the deal is done.

For Soul Pattinson investors, they’ll receive greater diversification and exposure to Brickworks, as well as greater financial flexibility. As for Brickworks, its investors will receive exposure to a more diversified portfolio and robust investment pipeline. Of course, there’ll be strong potential for NAV growth, benefiting both shareholders. Plus, the complexity of the cross-shareholding structure will be removed.

Conclusion

Two of Australia’s most renowned long-term success stories are joining forces. It seemed an inevitability for some years but is only happening now. Whichever way the construction sector goes one thing is for sure. Namely, that they’ll be less of a concern for BKW shareholders who’ll be more diversified, but more of a concern for those who only have SOL shares because now they’ll have direct exposure in their own right.

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