A long but miserable life

IF YOU had committed some of your hard-earned funds to buying Elders shares some four or five years ago, you would now be sitting on a loss of about 98 per cent of your money.

Given that, should you prefer a potential takeover or merger with Ruralco? Or do you favour the board’s view that it can flush out a better deal by putting its rural services business on the market?

Alternatively, do you conclude your money is gone for all time and in a spirit of retribution pray for the company’s board and executive to be afflicted by an illness that causes them to live long but extremely miserable lives?

I am one of those who bought Elders shares four or five years ago and confess the third option has certain appeal. But I acknowledge not all shareholders are like me and some may even be wondering whether something might emerge that will retrieve their money, or at least a bit of it.

On that front, the board’s strategy of selling the rural services division separately from the company has some logic. Ruralco has a sufficiently large shareholding to block a full takeover of the company, meaning an acquirer may gain a majority but would be unable to reach 90pc and thus compulsorily pick up the rest without Ruralco’s consent.

This is discouraging to possible acquirers and, with no competing bid, would leave Elders little choice but to accept Ruralco’s terms for a takeover. Putting the rural services division on the market separately from the company itself will avoid all that. An acquirer could buy the division with the approval of a simple majority of shareholders, leaving Ruralco with little say in it. Importantly, it has the potential to attract multiple bidders and thus a higher price.

Quite a few shareholders apparently dumped their shares following the announcement of the divisional sale strategy. I wonder if they have thought that through.

Ruralco’s business primarily involves wholesaling to independently-owned rural stores. While they nearly all trade as Combined Rural Traders or Town and Country, and buy the bulk of their merchandise from Ruralco, they take their independence pretty seriously. When there is a better deal available from one of the other wholesalers, such as AIRR (Australian Independent Rural Retailers), they are often tempted to buy there instead.

What they especially hate is the idea that their wholesale supplier, which still refers to them as “members”, is also competing with them. There have been low level grumbles about that ever since Ruralco retained some stores following its acquisition of Growforce in 2000 and the merger with Roberts in 2006. If Ruralco were to acquire Elders’ 216 rural stores, most of which compete head-to-head with CRT and T&C stores, there would be a rush of members to buy from AIRR, seek direct accounts with suppliers, and join the buying groups NRI and IHD. Ruralco’s turnover could drop by as much as 50 percent.

And then there’s the ACCC to consider. It is difficult to see Ruralco being permitted to acquire Elders without being forced to spin-off numerous stores in the interests of competition. It would be the equivalent of Metcash buying Woolworths.

All that simply means is that Ruralco should not pay too much for the company, something it might achieve if the rural services division fails to find a buyer.

All that probably means a takeover by Ruralco offers more potential for getting some money back than the sale of the rural division. In the latter case the purchaser will most likely be a private equity investor, meaning shareholders will be left with the proceeds but no prospects. If Ruralco buys the company, Elders shareholders will receive shares in Ruralco and the possibility of dividends and an increase in value.

On the other hand, history suggests that may not be particularly attractive either. When Ruralco merged with Roberts in September 2006, via a share swap, its shares were about $4.05. Currently they are around $3.15. Return on equity over the 5 years since has averaged 10pc, whereas ROE at Roberts was 18.2pc in 2005 and had been equally healthy prior to that. If I had been a Roberts shareholder, I would not be giving Ruralco a reference.

Ruralco has suggested it may be a bidder for Elders Rural Services, but for the reasons discussed above that would not be smart. Being forced by the ACCC to spin off half the acquisition, or losing half the company’s wholesale customers, would not be conducive to increasing shareholder returns.

So where does that leave Elders shareholders, including those who are deeply under water like me? Whereas the board’s plan may maximise the sale value of the rural services division, there is no tomorrow after it’s gone. And if Ruralco succeeds in taking the company over, tomorrow may not be worth much anyway.

How did it ever come to this? Quite frankly, I still favour the third option.

* An earlier version of this article claimed Ruralco and its two major shareholders, Washington H Soul Pattinson and Neal Edwards, jointly own about 34pc of Elders. That information came from a broker and is now known to be incorrect.

David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He owns shares in companies mentioned in this column. He may be contacted at reclaimfreedom@gmail.com

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6/11/2012 11:21:50 AM

Yet another self serving article by David. Yawn.
6/11/2012 12:52:53 PM

Yet another inane comment by Bagheera. Why can't you try to make sense?
7/11/2012 10:37:18 AM

Long ago, mid 80's, when I was strategic planning for Wesfarmers Rural Division they had just started down this same track (i.e. company branches competing with their own branded agents: wholesale -v- retail). History shows where it ended up. One or the other, but not both, it seems. Strategy is everything, and boards that fail to learn pay the consequences. Tradition weighed Elders down, death was inevitable eventually, even if it took 30+ years. The future? The firm closest to the customer always wins. Look out for the next phase, when the English-speaking Chinese suppliers sell direct.
Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com


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