Poultry investors may clip Rural Funds wings

Chicken, wine and almonds tend to go down nicely at the dinner table but would they fare so well in a sharemarket float?

This is one of the propositions which investors in the Chicken Income Fund (CIF) are pondering ahead of Thursday's contentious vote in Melbourne on whether to overthrow the manager, Rural Funds Management.

The vote was called by associates of ProTen, the Chicken Income Fund's arch rival in poultry, and its aspiring owner. ProTen's approach for "a merger of equals" was rebuffed as a "hostile takeover" by CIF earlier this year and the corporate feathers are flying.

Rural managing director and major shareholder David Bryant - who sold his funds to Great Southern Plantations at the zenith of the boom in 2007 and bought them back from the liquidator for a fraction of the price a year later - debunked ProTen's move to oust him as "ludicrous".

"Unequivocally," he told BusinessDay. "They will fall so far short [of the required vote at the meeting] that it will be revealed to be a severely misjudged exercise."

ProTen chief Daniel Bryant (yes, as opposed to David Bryant from CIF) was not so confident of victory. "Of the 27 per cent that have voted so far, 70 per cent have voted to have RFM removed." ProTen needs 50 per cent of all votes. But ProTen is unlikely to go away, whatever the verdict at the CIF meeting.

In the face of this latest overture from ProTen, the rapid growth rival from New Zealand, Rural's Byrant pledged to cut the fees to the fund, merge it with RFM's other almond and wine funds and float the group on the Australian Securities Exchange to bring more liquidity.

ProTen's Bryant reckons a float will fail investors - small cap agricultural offerings often do - and says Rural just wants to hang onto its management fees.

For unit-holders in the Chicken Income Fund this is not just a good old cockfight; the rivalry has put pressure on CIF to perform. Already, it has committed to cutting fees.

Still, while agricultural plays have had an infamously rough trot as investment propositions over the years, there is good money in chickens. The returns of both CIF and ProTen testify to that.

For its part, CIF has generated operating cash surpluses in all 10 years of operation. In the year to July 2013, it returned 13.7 per cent, for a total return for the 10 years since inception of 8.9 per cent per annum.

ProTen, a company rather than a fund, has grown faster. "We are doing $14 million of EBITDA [earnings before interest, tax, depreciation and amortisation], they are doing $10 million," said Daniel Bryant.

Further, ProTen claims that CIF has no motivation to reduce costs as RFM's fees are based on total costs. It says CIF has not made money for the past 2 years, yet it has extracted $4.2 million in management fees (after full cost recovery).

ProTen's pitch - rejected in talks with RFM a couple of months ago - is essentially that investors would be better off in a growing enterprise than listing on the ASX where its putative market cap of $115 million would ensure it was ignored by investors and traded at a discount. Doubling the size of the business via a merger, however, would give it critical mass and likely institutional funding support, thanks to a double-digit return on capital.

Rural's David Bryant concedes that a public float may see the group trade at a discount. It would merge CIF with its RiverBank fund (almonds) and Australian Wine Fund pre-float and has signed up CommSec to do the IPO.

Whatever the outcome on Thursday - and it would seem to be a win for Rural - it is unlikely ProTen will go away for too long.