The competition regulator has approved the merger of Boral and CSR's east coast brick businesses, freeing up valuable land for both companies and giving Boral a reason not to exit Australian brick manufacturing.
Australian Competition and Consumer Commission chairman Rod Sims approved the merger despite the fact that it will reduce competition to just two players in some states.
Boral chief executive Mike Kane said it was a case of merge or close plants.
"Frankly, I was incredibly surprised and pleased with the outcome today. I actually thought it was going to go the other way," Mr Kane said.
"I made it very clear in a presentation to the Commission that I was going to close and exit the properties in eastern Australia because the only thing in front of us was diminishing returns."
In October the ACCC published a negative statement of issues outlining significant concerns about the deal, but on Thursday it concluded the deal would "be unlikely to substantially reduce competition".
The regulator originally believed that Boral and CSR would continue making bricks separately if the deal was vetoed and would sustain the current three player marketplace comprising Boral, CSR and Brickworks.
But after the meeting with Mr Kane and several public statements that Boral would exit bricks without a deal, Mr Sims changed his mind.
"Critical to the ACCC's decision was the assessment that Boral would be unlikely to remain in clay brick manufacturing in eastern Australia if the joint venture does not proceed," he said.
"Without this conclusion, the proposal raised considerable competition concerns."
CSR managing director Rob Sindel said the JV will give both companies the chance to convert real estate currently used for brick making into industrial or urban developments. CSR's most valuable site is the Schofields site in Sydney just off the M7 motorway.
"The question for us was how do we develop that site without losing our position in the [brick] market. The JV is the best option," Mr Sindel said. "Its an opportunity to make an industry facing structural decline more competitive."
Mr Sindel said that for the past few years bricks has either been losing money or generating small returns, and reinvestment was not attractive.
"If you don't reinvest you lose productivity and maintenance costs go up. This enables us to reset plants, take inefficient operations out of production, and reinvest in the business," he said.
The joint venture will generate $230 million in revenue and will be 60 per cent owned by CSR and 40 per cent owned by Boral. Initial cost savings of $7 million to $10 million are expected from cutting overheads in the JV.
CIMB analyst Andrew Scott said the deal is "incrementally positive" for both companies and there are likely to be more cost savings down the track.
"We'd view that [$7 million to $10 million] as a first pass on some of the easy wins. Certainly they will be able to rationalise some sites and consolidate some manufacturing," Mr Scott said.
Mr Kane said the consolidation of some sites is critical to boosting returns, lifting capacity utilisation, and freeing up capital to reinvest.
"Even at the top of the cycle we are not fully utilised in these assets and that's the problem we are trying to solve given the high fixed costs," he said.
Boral was earning a return on funds of around 5 per cent in bricks. Its cost of capital is around 12 per cent. "Through this combination there is a pathway to attract the cost the capital and invest in this business," Mr Kane said.
Boral's board had already given approval on a plan B to start exiting bricks if the JV was knocked back.
Boral shares rose 9¢ to $5.11 on Thursday. CSR shares jumped 11¢ to $3.63.
