ELDERS has rejected the offer by Ruralco for its Rural Services division, and Ruralco has formally withdrawn it. The more things change, the more they stay the same. Nothing to see here.
Except that everything has changed. Business as usual is not possible.
For starters, Ruralco retains a 12 per cent shareholding in Elders on which it is under water. Holding an asset worth several million dollars less than it cost and which generates zero return with no exit strategy will not look good on John Maher’s CV.
Elders clearly believes the sale of its automotive parts division will proceed, giving it some breathing space from lenders. The problem is, borrowings will still be over $300 million even with the proceeds, and the sale of remaining forestry assets won’t make much difference.
And then there is the fact that there was no queue of buyers for Elders Rural Services. Ruralco’s bid was the only one. While it is understandable that Elders might be unimpressed by a bid that wouldn’t even allow it to repay debt, it is never a good idea to claim to know better than the market.
So how might things develop now? There are a few possibilities.
The one that Elders obviously prefers is for the company to enjoy a resurgence in business performance leading to a substantial rise in profits that enables it to reduce debt to comfortable levels. A capital raising is also not inconceivable under that scenario.
In theory that ought to be possible. In 2001 the Rural Services division generated EBIT of $101 million. The problem is, recent history suggests it’s not realistic. Underlying EBIT in 2011 was just $25 million and in 2012 $29 million. In the six months to the end of March it was slightly negative. The company can’t cover interest costs, let alone repay any principal.
While there are some fine people in the Rural Services division, it’s not as if they haven’t had enough time to turn things around. Even with a series of bumper seasons, I don’t think they could do it. What the business needs is an injection of capital and some fresh thinking. As it stands, unless it undergoes radical restructuring such as selling and franchising its stores to management, a major turnaround is quite unlikely.
The scenario that Ruralco probably prefers is for Elders to eventually collapse, allowing it to pick up the pieces from a receiver for less than it offered in its rejected bid. That might also allow it to only grab the bits it wants, leaving the indigestible bits to others. As I have previously discussed, Ruralco would face some significant challenges if its bid for the whole business had succeeded.
Against that is the fact that there is no telling how long it might take, and it would undoubtedly be messy with a host of bottom feeders competing for the pieces. A key issue would be securing rights to the Elders name, without which the rest is not worth a lot.
Somewhat related, Ruralco might opt to sell its stake in Elders and cop the loss, on the assumption that something is better than getting nothing if the company collapses. On the other hand, it might reason that holding the shares will discourage potential bidders, thus increasing the inevitability of collapse.
And then of course there is the possibility that a new bidder might emerge to take over Elders, pay off Ruralco and the banks, and give the business a new sense of direction and commitment. And if I was in the mood for fantasy, I could probably think of a few more like that.
I’m not sure how this will turn out, but whatever happens, it won’t be business as usual for either Elders or Ruralco.
David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at email@example.com