SUBJECT to ACCC approval, it seems Ruralco may soon own Elders Rural Services. This is despite previous denials by Ruralco that it was planning a takeover and notwithstanding Elders’ strategy of selling the Elders Rural Services separately in an effort to attract more suitors.
Whether this is good or bad depends on your perspective. Suppliers will be worried that it takes them closer to a Coles/Woolworths scenario in rural merchandise. Customers of Elders and Ruralco may or may not find it beneficial. And for Ruralco shareholders, it is a huge risk.
In the animal health market, which I know well, Ruralco and Elders have a combined share of around 35 per cent of the national rural market. It is much higher than this in Tasmania, at more than 85pc, as a result of Ruralco’s acquisition of Roberts in 2006.
The next biggest competitor, Landmark, has a national share around 25pc. Thus a merged Elders/Ruralco plus Landmark will together account for 60pc of the merchandise market.
Suppliers are nervous about that. Less diversity in distribution exposes them to the sorts of problems seen with supermarkets – deletion from stocking policies in favour of competitors or house brands (an emerging issue with Landmark) and pressure to reduce prices and enhance retail margins.
For customers of Elders and Ruralco, much will depend on how the businesses operate. Farmers are often not impressed by change and are particularly disturbed when personal contacts disappear. High staff turnover in the Elders stores or too many changes in the way it operates could seriously damage the business.
On the other hand, rural distributors tend to compete on the basis of price (generally at the expense of suppliers) similar to the supermarkets. If there is more of that as a result of the acquisition, it might lead to some handy savings for farmers.
Ruralco shareholders should probably be more nervous than suppliers or customers. Undoubtedly the high debt and loss-making forestry activities have been important factors in Elders’ share price decline, but Elders Rural Services has also lost a lot of market momentum. It is not the company it used to be.
The question for shareholders is, what can John Maher and his team do that Malcolm Jackman and his team have been unable to do? Can they substantially lift performance without adversely affecting the performance of their existing business?
As I have previously discussed, Ruralco is principally a wholesaler selling to retail stores trading as Combined Rural Traders or Town and Country. While these stores buy the bulk of their merchandise from Ruralco, they take their independence seriously. When there is a better deal available from one of the other wholesalers, they are often tempted to buy there instead.
They will undoubtedly object to their wholesale supplier, which still refers to them as “members”, competing with them through Elders stores. 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. The acquisition of Elders will really set them off.
It is entirely possible there will be a rush of retailers moving to buy from other wholesalers, seek direct accounts with suppliers, or join the buying groups NRI and IHD. Quite a lot of what Ruralco gains through its acquisition of Elders is at risk of being lost from its wholesaling business.
It is also highly likely the ACCC will require Ruralco to divest a number of its Tasmania stores in order to reduce its market dominance there.
Given retail margins are somewhat higher than wholesale margins, perhaps Ruralco thinks it is ready for that. The trouble is, any decline in sales seems to have quite an impact on the bottom line. Just last week it signalled a reduction in profits of up to 70pc due to slow sales. Since profits are already low, that doesn’t leave much to fund the shortfall already signalled at Elders.
Given the fact that Ruralco will need to raise equity to fund the acquisition, meaning existing shareholders will have their equity diluted unless they invest more money in the company, I would not be hanging around if I was one of them.
But perhaps I am doing the company a disservice. For all I know, Ruralco might have a plan to transform Elders into a seriously profitable business that will deliver great shareholder returns. Perhaps it will sell equity to the staff in each store and operate them as franchises, using its strength in wholesaling to make it all work. And perhaps it won’t, and it will end in tears.
David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at firstname.lastname@example.org