Accounting for Soul Patts/Brickworks' Feedback Loop

• On the 2 June, Washington H. Soul Pattinson and Co. Ltd (SOL AU) (Soul Patts) and Brickworks Ltd (BKW AU), announced that, via inter-conditional Schemes, they would collapse their circularity.

• A new ASX-listed company (TopCo) would acquire all of the shares in Soul Patts and Brickworks, via the issuance of TopCo shares; 1:1 for Sout Patts, and 0.82:1 for Brickworks.

• Given the cross-holding, an interesting exercise is understanding the underlying values for both Soul Patts and Brickworks.

This insight delvers into the adjusted NAVs - for the circularity - for Soul Patts and Brickworks.

For my read/view of the Offer, please refer to Soul Patts/Brickworks To Unwind Circularity.

This appears a very clean deal.

This NAV analysis does not change my viewpoint on the transaction; but it is useful in discerning what may be TopCo's value after collapsing the cross-holding.

The Trade:

• The trade is to short SOL, buy BKW.

• I see the current spread at 0.90%. Super tight.

• BKW is not particularly illiquid.

• Look to take down borrow in SOL.

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How To Value A Cross-Holding?

• My understanding is that there is no universal rule to account for this feedback loop.

• On page 25 of Soul Patt's interim report, the weighted average number of shares are 325.8mn after deducting 40.8mn shares for Brickworks' reciprocal interest. Brickworks holds 94.3mn shares in Soul Patts. As Soul Patts holds 43.1% in Brickworks, 40.8mn shares are netted off (43.1% x 94.3mn).

  • In addition, page 26 of Brickwork's 2025 interim report, the weighted average number of shares are 136mn after deducting 16.9mn shares for Soul Patts'' reciprocal interest. Soul Patts holds ~66.64mn shares in Brickworks. As Brickworks held 25.65% in Soul Patts - at the time - 16.9mn shares are netted off (25.65% x 66.64mn).

• I find the above approach too simplistic to account for the circularity.

• I prefer the following methodology.