RURALCO can now virtually guarantee that a suitor seeking to take over Elders will be obliged to negotiate. It is still possible to gain majority control without talking to Ruralco, but most potential acquirers would aim for 100 per cent. For that they need at least 90pc of the shares to allow compulsory acquisition, and that is now not possible without Ruralco’s agreement.
Achieving such a position seems to be the reason for Ruralco’s acquisition of 10.1pc of the company.
Ruralco’s managing director John Maher would not have spent $10 million of the company’s carefully managed capital as a passive investment, even if Elders was a sound business. And it’s not; it came close to collapse not long ago and is still far from healthy.
Which raises an interesting question - does John Maher know something about the potential for a takeover of Elders that the rest of us don’t? It has long been speculated the company is a likely takeover target with its strong brand franchise, national store network and rock bottom share price. Some believe it is only the company’s debt burden, plus the fact that there are so many shareholders under water who might be reluctant to sell, that have prevented a takeover already.
Assuming there are potential acquirers out there who might be interested, several possibilities come to mind as to how things might play out.
One is for Ruralco to simply block an acquirer because the existing Elders is seen as a preferable competitor to what it might become if it was acquired. A decade of poor leadership and flawed investments have left the company in a weakened position from which it will take years to recover by itself. That would, presumably, be good for Ruralco.
Another is for Ruralco to actively encourage potential acquirers, perhaps even setting up a bidding war, and extract a greenmail profit on its investment. In 2002 Elders used a 21pc stake in Incitec to extract some sizeable greenmail out of the merger with Pivot, so it would be a little ironic if Ruralco were to do the same with Elders.
But I have another theory, suggested to me by a Machiavellian friend, which I find more compelling.
I suspect Ruralco might encourage a takeover bid as a way of acquiring certain parts of Elders’ operations. John Maher previously worked for AMLC (now MLA) and was heavily involved in live exports to Indonesia. I suspect he sees this as a field in which Ruralco should be involved, and what better way than to take over the well-established and efficient business he helped develop.
I strongly doubt Ruralco has any interest in taking over the whole of Elders even if a buyer is found for automotive and forestry. John Maher’s tenure at Ruralco since 2006 has been marked by a calm focus on the company’s core business and organic growth, with no appetite for major acquisitions.
Moreover, while an acquisition might be funded by scrip, taking on Elders’ debt would destroy Ruralco’s carefully nurtured balance sheet. And unless Ruralco could transform Elders’ rural services business into something like its own model, it is difficult to see how it could add value.
This story has a way to go yet and may end up nowhere significant. If no buyer is found, Ruralco could be left as a minority shareholder in a poorly performing competitor with no way out.
But my money is on one or more potential acquirers appearing in coming months, cashed up and ready to negotiate with Ruralco. And it would not be surprising if Elders was not listed on the Australian Stock Exchange in 12 months.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at firstname.lastname@example.org