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By Antony Currie

MELBOURNE, June 2 (Reuters Breakingviews) - Why would any management team choose to turn their company into a conglomerate? Such constructs are usually unwieldy, a time suck for executives, and tend to trade in public markets at a discount. So Australian fund manager Washington H Soul Pattinson's SOL.AX agreed A$14 billion ($9 billion) tie-up with building materials firm Brickworks BKW.AX, unveiled on Monday, might appear to be a financial cardinal sin. But the deal is a merger in name only.

What's driving the transaction is a desire to unwind the pair's cross-shareholdings that date back to 1969. Back then, when Soul Patts, as it is usually known, was still just a pharmacy operator, the two companies wanted a defence against corporate raiders. Several attempts from outside shareholders in the past couple of decades to do away with the unwieldy structure, including one that ended up in court in 2017, came to naught.

A key issue preventing an unwind was that offloading the money manager's 43% stake in Brickworks and the materials firm's 26% of Soul Patts' would come at a steep cost: the shares would almost certainly need to be sold at a discount and would attract a hefty tax bill. Monday's transaction is likely to get around that by creating a new holding company to buy both firms and cancel their crossholdings and consolidate their operations - assuming Canberra's bean counters give the structure the nod.

That is where any pretence at this being a merger ends. Brickworks shareholders will own just 19% of the holdco. Only two of their directors will be on the new entity's eight-person board - and one of those, Robert Millner, is chair of both of the predecessor companies.

Crucially, once the deal is completed, the junior partner's businesses will be divided up between Soul Patts' private equity and property funds. In other words, CEO Todd Barlow is effectively treating the deal as a $3 billion buyout that will keep Brickworks' assets as part of his company's diversified investments - but from now on as ones that are easier to sell, should he wish to do so.

Brickworks' shares shot up 26% on the deal's announcement but its buyer's stock gained 15%, too. That confirms that the union to ditch the outdated cross-shareholding is a smart way to unlock value.

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CONTEXT NEWS

Australian money manager Washington H Soul Pattinson, usually referred to as Soul Patts, has agreed to merge with building products company Brickworks in a deal that values the combination at some A$14 billion.

The two companies have held large minority stakes in each other since 1969: Soul Patts owns 43% of Brickworks, which in turn owns 26% of the asset management firm.

The transaction involves a new entity buying both companies. It will pay a 10.1% premium to the closing price on May 30 for Brickworks shares, but no premium for Soul Patts' stock. The new firm has also received commitments from investors willing to buy A$550 million of new equity, conditional on the deal closing. Assuming that happens they would own 9% of the new company, Brickworks shareholders would own 19% and Soul Patts shareholders the remaining 72%, the companies said.

(Editing by Una Galani; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))