​ CSR Limited (CSR) and Boral Limited (Boral) announced today that they propose to form a joint venture to combine their brick operations located on the east coast of Australia including operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT.

CSR and Boral will approach the Australian Competition and Consumer Commission (ACCC) seeking clearance for the transaction. Completion of this transaction is subject to clearance by the ACCC.

The proposed joint venture will be owned 60% by CSR and 40% by Boral reflecting the relative valuation of the two businesses. There is no cash consideration as part of the proposed joint venture.

Brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Lower brick demand has resulted in declining capacity utilisation, reduced profitability, plant curtailments and closures.

The proposed transaction will enable both Boral and CSR to access additional operational and overhead efficiencies that would otherwise be unavailable to the parties acting independently.

With combined revenue in the order of $230 million, initial overhead savings of $7-$10 million per annum are expected following the formation of the joint venture and integration of the businesses. Longer term, consolidation of selected manufacturing sites will lower per unit costs of production and enable both companies to develop selected high value  and assets without impacting product range and operational capability. It also positions the business to deliver returns that recover the cost of capital through building cycles.

Boral’s CEO & Managing Director, Mike Kane said: “The Australian cladding industry has faced major changes in demand over the past 30 years resulting in a significant reduction in brick use. The reduced level of utilisation in our brick manufacturing plants coupled with high input costs has meant that brick production in Australia has been increasingly challenged.

“This joint venture is aimed at driving efficiencies across the combined network of operations and would provide a path for Boral to realise acceptable returns for our brick business and therefore secure our long-term commitment to the industry.”

CSR’s CEO & Managing Director, Rob Sindel added “This joint venture is about retaining manufacturing in Australia and maintaining clay bricks as a choice for consumers in a broader cladding market. It is about strengthening the opportunity for employees and reinvesting in the industry while delivering satisfactory returns through the building cycle.”

BACKGROUND INFORMATION:

The Australian cladding industry

Brick manufacturing is part of a broader cladding industry supplying residential and non-residential construction segments. Australian brick manufacturers have experienced a sustained structural downward trend in demand for brick products over the past 30 years.

Despite a general increase in construction activity over this period, total brick production in Australia has fallen by 46% from its peak in 1981 due to a number of factors including:

• A change in the dwelling mix away from detached houses (which are traditionally more brick intensive) towards multi-residential units and in particular high-rise construction which tends to favour use of alternative cladding materials compared to brick.  
• Changing construction methods, which have virtually eliminated double brick construction from detached houses on the east coast of Australia and substituted this with frame and cladding systems using single brick veneer as well as alternative cladding products.
• Emerging trends in external façades in housing that are moving toward rendered walls and alternative cladding materials, including concrete panels, masonry blocks, fibre cement, metal products, timber and glass products.

This reduction in brick demand has impacted the brick industry as a whole and particularly Boral and CSR as declining capacity and reduced plant utilisation has resulted in plant closures and curtailments.

To date, the parties have sought to address these challenges through significant reductions in overhead and operating costs including closing and mothballing plants and entering into cross supply and purchase arrangements in various states.

Despite these actions the brick businesses fail to meet required profitability and overall return on capital employed measures.

Benefits of the proposed transaction

The proposed transaction will enable Boral and CSR to deliver a number of efficiencies that would be unavailable to the parties acting independently including:

• Consolidate overhead costs including sales, administrative and marketing through a single management structure.
• Develop more efficient freight and distribution networks, leveraging the location of the combined manufacturing footprint to improve service and reduce costs.
• Potentially rationalise the number of sites in some states, particularly where sites have been mothballed while investing in other sites to improve operational and technical efficiency.
• Allow redevelopment of certain land assets over time, without foregoing the ability to provide a similar product range and operational capability.

Cost synergies as a result of the formation of the joint venture are expected to position the combined business to recover the cost of capital over the longer term. This in turn will ensure the sustainability of the Boral and CSR bricks businesses.

Proposed joint venture business

The combined business will have capacity of approximately 600 million bricks from 12 manufacturing operations across the east coast of Australia.  There are no immediate plans to close any Boral or CSR operating sites following completion of the proposed joint venture.

The following land assets will be excluded from the joint venture, with these properties being leased to the joint venture:

• Scoresby (Boral-owned)
• Schofields (CSR-owned).

Boral will have an option to terminate the lease at Scoresby in 10 years, by providing three years notice.  The Schofields site will be leased to the joint venture for five years.

Additional land not currently used for brick manufacturing operations at Bringelly (Boral owned) and Horsley Park and Oxley (both CSR owned) will be excluded from the transaction and retained for development by the respective shareholders.  All other sites will transfer to the joint venture.

Further details on the proposed commercial structure are expected to be disclosed following completion of the ACCC review process.  Until that time, all Boral and CSR brick operations will continue operating as normal.