Thanks but no thanks, says Elders, now it's time for plan B
Both have spent the past year (or more in Billabong's case) looking for a buyer. And neither could find one. Elders looks like it will find a home for its automotive division, but the centrepiece, the rural services business, has been left on the shelf.
The most obvious buyer walked away from the auction room on Tuesday. Ruralco had been hanging around for a year. Its first offer lobbed around September and was rejected. The most recent offer was even less generous. Needless to say Ruralco was shown the door.
Ruralco has Australian Competition and Consumer Commission clearance. It also has a 12 per cent stake in Elders and could thus meddle with any other party that was looking to make a bid.
The Ruralco offer was only for the Elders' rural services business and neither side is prepared to reveal the exact amount. But neither is disputing speculation that $250 million was close enough to the mark. Elders is also in negotiations with a couple of parties to sell the automotive business, which is expected to fetch about $70 million.
To have accepted the Ruralco offer, the banking syndicate would have had to take a haircut on its $340 million of loans. The value of the equity and the $150 million of hybrid securities would be zero.
Brokers have placed values on the Elders rural services business of $320 million to $385 million - which in depressed conditions in the agricultural market look pretty optimistic, and these are certainly not being reflected in the share price, which is perched at 7.1¢.
Having decided to spare Elders an undertaker, the banks will now have to come up with a plan B, the company simply cannot be left in its current overgeared structure. One of the reasons will be that to date Elders has managed to pay its interest bills - even in the lean years.
Given the seasonal nature of the agricultural industry, next year could see a positive turnaround in earnings, but it could also see a deterioration. It has been a tough year for everyone, with hot, dry weather and plummeting livestock prices pushing earnings lower.
Ruralco's earnings fell in the first half of the financial year by 50 per cent, even before taking into account the loss on its stake in Elders.
The banks would not want to be rolling the dice too often. It is now up to Elders chief Malcolm Jackman to get some cost out of what is a high working capital business. He has been in rescue mode since he first put his feet under the desk four years ago. But this won't address the more fundamental problem of repairing the balance sheet.
Only two immediate solutions spring to mind. The first is to get a major equity injection from a third party - an avenue being investigated - most likely an offshore party, probably Asian. The second is to undertake some debt for equity swap with lenders. But banks traditionally have been loath to do this other than as a last resort.
Frequently Asked Questions about this Article…
Ruralco pursued the Elders rural services business for about a year, including an initial offer around September and a more recent, less generous bid. Ruralco — which has ACCC clearance and a 12% stake in Elders — ultimately walked away from the auction and its offer was rejected. The bid was reportedly only for the rural services arm and speculation put the offer close to $250 million.
Accepting Ruralco's reported offer would have forced the banking syndicate to take a large haircut on roughly $340 million of loans, leaving equity holders and about $150 million of hybrid security holders with little or nothing. Given those consequences, the banks and Elders declined the offer.
Brokers have placed values on Elders' rural services business in the range of about $320 million to $385 million. By contrast, Elders' share price at the time of the article was sitting at around 7.1 cents, which the article notes does not reflect those broker valuations.
Elders was in negotiations with a couple of parties to sell its automotive business. The automotive division was expected to fetch roughly $70 million if a sale proceeded.
Elders is described as overgeared — carrying too much debt relative to its equity — including approximately $340 million of bank loans and about $150 million of hybrid securities. The business is high working capital and exposed to seasonal agricultural swings, which has pressured earnings. Although Elders has managed to keep paying interest so far, the balance sheet needs repair.
The article identifies two immediate options under consideration: (1) a major equity injection from a third party — most likely an offshore (probably Asian) investor — and (2) a debt-for-equity swap with lenders. It also notes that banks are typically reluctant to pursue debt-for-equity except as a last resort.
Because Elders' core business is tied to agriculture, seasonal conditions can swing earnings. The article warns next year could bring a positive turnaround in earnings or further deterioration. The recent year was tough due to hot, dry weather and plummeting livestock prices, which pushed earnings lower.
CEO Malcolm Jackman has been focused on cost reduction and rescue measures since taking the role four years earlier. He is working to get costs out of what the article describes as a high working capital business, but those measures alone are unlikely to fully repair the company's balance sheet without additional capital or lender restructuring.
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