Orica's $725 million raise is more of the same

Orica’s $725 million raise is more of the same

What Gandhi calls prudence – disappearing the proceeds of new shares into operational expenditure – is more commonly known as capital ill-discipline, though investment bankers just call it a dream client.

The placement’s co-underwriters, Citi and JPMorgan, know each other well, having performed the same roles on ANZ Banking Group’s $2.5 billion placement in 2015 – subject of the ACCC’s blockbuster cartel case only abandoned in February. It’s fair to say the two ECM desks will be choosing their words very carefully if any demand shortfall leaves them with surplus Orica stock.

Languishing through a bull run

Orica bussed more than 40 analysts and fund managers to the Hunter Valley last week for a site tour of its technical center in Kurri Kurri to beguile them with the company’s (age-old) technology narrative. That lucky crew learned on Wednesday morning there’s no such thing as a free lunch.

On completion of the latest raising, there will be 19 per cent more Orica shares on issue than there were in October 2019, and over the same period (based on consensus for FY22) earnings before interest and tax will have fallen by 19 per cent. Dividends are down 38 per cent. What are these outputs if not fundamental to the underlying business?

From the global financial crisis to COVID-19 and beyond, Orica has languished right through the bull run in Australian equities and the corresponding boom in resources investment. It’s some feat when your only real job is to deliver explosives to mine sites.

It was the legendary bully Ian Smith who privately described Orica as a blancmange; the harder you try to beat it into shape, the more resolutely it wobbles back to its original form – namely sprawling and unfocused.

Smith’s predecessor, Graeme Liebeltbought mining chemicals company Minova from a British private equity group for $857 million in 2006 and bolt maker Excel for $775 million the following year.

Minova and Excel were folded into a new ground support division and in August 2015, Orica impaired the carrying value of that division by $850 million. In December, Orica finally managed to sell it to German asset manager Aurelius for just $180 million.

And yet here Orica goes again!

In recognition of his magnificent record of capital allocation, Liebelt was appointed to the board of ANZ Banking Group in 2013, where he remains, contributing to the dissolute oversight of Shayne Elliott‘s own era of value destruction. How good is Australia?

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