ELDERS recently reported a loss of $505 million for the year to the end of September, with an underlying EBIT loss of $42 million. Shareholder equity is down to $46 million, close to market capitalisation, while net debt is $255 million.
The company’s auditors have noted material uncertainties affecting whether the company can continue as a going concern and pay its debts as they fall due. The managing director, Malcolm Jackman, has left the company.
All this sounds quite disastrous. But according to Mark Allison, the company chairman, it is actually good. He says the result marks the near completion of a five-year process of rationalisation and restructuring of assets, operations, finances and carrying values.
Moreover, he thinks the company owes Jackman for saving the company from an even worse outcome. Subject to a need to raise additional capital, the implication is it is plain sailing from now on.
As I have written previously, in 2001 Elders had net equity of $741 million and generated earnings per share of 13.2 cents, representing 11.1pc return on equity. The company’s market capitalisation was $734 million.
While it has all been downhill since then, the rate of decline accelerated during Jackman’s tenure. Over the five years in which he held the top job, the company lost a total of $1.59 billion. If you had committed some of your hard-earned to buying Elders shares four or five years ago, you would now be sitting on a loss of about 98 per cent.
So how much worse could it have been? For most people, not a lot.
What Jackman avoided was a company collapse and the appointment of a liquidator. While that does not look good on anyone’s resume, in fact the only stakeholders who have reason to seriously thank Jackman are the banks (and there is still time for them to change their mind on that).
If the company had gone broke, as many expected, shareholders would have lost all remaining equity. That’s unfortunate but there was not a lot left to lose. Some suppliers may have lost money too, but most had Elders on credit watch and were not allowing debts to accumulate.
Staff would have kept their jobs because each business would have been sold. As for the core farm services business, that is inherently quite valuable and there would have been considerable interest in buying it once the burden of debt was removed.
Indeed, debt holders would have been the main casualties. For some years Elders has only been solvent because of the indulgence of its lenders. If a liquidator had been appointed, the banks in particular would have had no option but to take a haircut. Jackman’s legacy is having performed the work of a liquidator for the benefit of the banks.
Could it have turned out better? Quite likely. Debt could have been reduced faster if some of the non-core businesses had been sold earlier, although the lingering effects of the GFC and global economic downturn may have meant lower prices were received.
Should Ruralco’s offer of $250 million for the farm services business have been accepted? Maybe, but it would not have helped shareholders as it wasn’t enough to pay off the debt, and it would have left the company with few assets. I suspect it would have proved to be an indigestible acquisition for Ruralco too.
A lot could have been done with the rural services business to reduce costs and boost the bottom line. Under Jackman the company gained a reputation for hubris and lavish sponsorships, with too many employees disconnected from the pointy end of the business. It is only in the last few months that some of these concerns have been addressed.
Assuming the banks remain grateful for Jackman’s efforts, the task now is to recapitalise the company. While the auditors talked about further disposal of assets, that won’t be enough. The company needs to raise additional equity from shareholders.
But that’s where there is a problem. Perhaps because he is not a retailer, and Elders’ business is dominated by retailing, or perhaps because he just didn’t know how, but Jackman was never able to drive the rural services business to generate consistent profits. Overall, all he managed was steadily worsening performance and an endless list of excuses.
This continued in the latest annual report, which shows underlying EBIT from the farm services network shrank from an $18.2m profit in 2011-12 to a $36.3m loss in 2012-13, on revenue of $1.2 billion. The short explanation was "seasonally affected lower network sales and an unprofitable result from global cattle trading". There is a more detailed explanation too, which reads like a typical year in Australian agriculture.
Whatever the cause, such dismal results will have consequences when the company seeks to raise capital. Nobody is going to invest in a business that loses money unless there is a convincing transformation pathway on show. And fairly obviously, if such a pathway exists it might be considered a bit late to be implementing it now.
The suggestion that Jackman saved the company from a worse fate is like the claim that Kevin Rudd saved Australia during the GFC. Maybe they made a minor difference in an insignificant way, but they each stayed too long and are both better gone.
David Leyonhjelm has been an agribusiness consultant for 25 years and was recently elected to the Senate for the Liberal Democrats. He may be contacted at firstname.lastname@example.org