Elders is a bit like the rural services version of Billabong - an iconic brand with a business that strategically misstepped, bought the wrong assets, paid too much for them and is now lumbered with too much debt.
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.