Elders' rough fight in the fields

As Elders remains determined to go it alone under pressure, Ruralco's John Maher is gaining support for his resolve to fight out a merger.

It is now clear that the face of the Australian pastoral house industry is about to change dramatically. Elders is unlikely to survive in its present form. It is set to be either sold to an overseas group or it will come together with Ruralco.

The cornerstone of the Ruralco proposition to Elders is Ruralco’s belief that the combined company can raise between $100 million and $140 million in new equity to reduce bank debt. Ruralco believes that the equity raising option is not available to Elders alone because of its poor track record. By contrast, the success of Ruralco under chief executive John Maher would attract the required equity support should there be a merger.

The outlook for the Australian rural industry has never looked better and China clearly sees Australia as a source of high quality food. It's a good time to raise equity. Given this situation Elder’s belief that it is best to make it alone is understandable but the Ruralco equity card will be very powerful. It's also a good time to sell to an overseas bidder trying to get a slice of the looming better rural times.

Australian institutions are notorious for thinking short-term but if they sell Elders overseas, Australian superannuation holders will have very few avenues to participate in future rural prosperity.

Because Ruralco believes it can raise the required equity under its plan there would be no need for the merged company to be a forced seller of the automotive parts business or to run down forestry. Currently Elders is under bank pressure, which is speeding the automotive sale. Ruralco believes the forced sale will destroy value and it is better to distribute the parts business to shareholders. But we will have a tussle between two very determined CEOs (Can odd pastoral partners take on Landmark? October 4).

Ruralco's Maher has a good record as a pastoral house executive. For a decade he was the chief operating officer of the then Wesfarmers-owned Landmark and he helped turn the old Dalgety Company into a market leader.

His success played a big role in enabling Wesfarmers to sell the business to AWB for a large sum. Wesfarmers encouraged Maher to sign a two-year deal with AWB to manage Landmark. The day after he completed his contract he resigned and then became CEO of Ruralco, which merged with Roberts in Hobart. Maher moved to Hobart. (AWB later sold Landmark to the Canadian giant, Calgary based Agrium Group.)

Maher had a huge initial success at Ruralco and earnings per share in 2007-08 totalled 35.2 cents a share. But then they slumped to 15.9 cents in the tough 2008-09 year. In the year to September 30, 2011 earnings totalled 27.2 cents, and brokers are predicting 29.2 cents for the 2011-12 year despite a small dip in the first half-year.

Almost certainly Maher believes that Ruralco can substantially lift Elders' margins, partly by slashing head office expenses. While there will clearly be some rationalisation of outlets Ruralco believes that it makes sense to duplicate the Westpac St George/Bank of Melbourne strategy and continue to market under the Elders brand and Ruralco’s ‘CRT’.

Ruralco’s corporate model is different to Elders. Elders operates branches like banks. Ruralco uses the Metcash model and it has 320 owner operator distributors, and there are another 200 where Ruralco has equity. Some of the 200 Ruralco owns outright, but in most cases the manager of the local store has 'skin in the game'.

Many of these operators combine a second business, such as Mitre 10 hardware.

Ruralco is capitalised at around $190 million whereas Elders has a market capitalisation of just over $100 million but it has Hybrids with a face value of $145 million.

Ruralco has been talking to its customers and joint venturers about an Elders merger and received a positive response. It will not be long before the gloves are off.