The Agricore United Board of Directors has unanimously recommended that securityholders reject the hostile takeover bid by Saskatchewan Wheat Pool Inc. (SaskPool). The recommendation is contained in a Directors’ Circular that was filed with regulatory authorities Dec. 13.
“The offers are financially inadequate and significantly undervalue Agricore United,” said Jon Grant, chair of the AU special committee that assessed the offer. “Further, under the offers, holders of Agricore United’s limited voting common shares and convertible debentures can only receive SaskPool shares, not cash. As such, the value they receive is highly uncertain and subject to a number of significant risks.”
To emphasize the last point, AU said that a $100 investment in SaskPool shares made on April 2, 1996 (the day it became public) would have declined 95.8 percent to Nov. 7, 2006, whereas the same investment in AU’s limited voting common shares would have appreciated by 46.4 percent (assuming the reinvestment of dividends).
AU also says it is not getting a premium for a change in control. It says SaskPool is only giving holders of common shares a 13 percent increase over the Nov. 7 price, whereas the average premium for deals occurring between 2000-2006 is 53 percent.
Another reason for not accepting the offer was the likelihood that another offer may emerge. The company said that it has been receiving interest from other parties. Plus, AU said it is content to continue as is. As of Dec. 11, AU common shares on the Toronto Stock Exchange have gone up 36 percent, to $11.24 from $8.24, the price on the last trading day prior to the SaskPool offer.
AU was also not buying the argument that the deal would bring $60 million per year of synergy savings, suggesting that it is already an efficient company. As for any rail synergies, it says it already maximizes rail incentives by shipping 80 percent of its export grains in multi-car blocks, compared to the industry average of 68 percent in 2005.
AU also noted that there are significant regulatory risks. AU said that it has been informed by the Canadian Competition Bureau that the SaskPool/AU proposal has been labeled “very complex,” which may lead to a significant sell-off of assets if the deal proceeds. According to AU, SaskPool has refused to suggest possible assets to be sold off, and it is uncertain a company would be as viable once any sell-offs occur. AU also fears that any assets to be sold would have to be done in a short timeframe and would be sold under value. The Bureau may seek to block the deal altogether, AU added.
According to the Competition Bureau, only about five percent of merger transactions are labeled “very complex.” They are typically characterized by indications early in the examination that the transaction is likely to create or enhance market power, according to the Bureau’s enforcement policies. As a result of this designation, the Bureau will have five months to perform the standard review, which would end on May 4, 2007.
AU noted that it had to sell off assets after the 2001 merger between Agricore Cooperative Ltd. and United Grain Growers Ltd. It also noted that Canadian authorities are currently weighing whether SaskPool and James Richardson International Ltd. need to disband their grain handling joint venture at the Port of Vancouver. The only other competitor at Vancouver is AU. A SaskPool/AU deal could exacerbate concerns at Vancouver.
AU said the SaskPool bid does not adequately reflect AU’s strong momentum, superior asset base, attractive long-term growth prospects, and steady debt reduction. AU also said it would contribute 59 percent of the cash flow to the new company. AU just recently reported record results (GM Dec. 4, p. 1). On Dec. 14, AU increased its quarterly dividend to $0.04 per share on limited voting shares, payable on Feb. 15, 2007, to shareholders of record on close of business Dec. 29, 2006.
Archer Daniels Midland Co. is ultimately sitting in the catbird’s seat – as of January 2007, it will own 28 percent of AU’s stock. Some 75 percent of AU’s stock must be tendered for SaskPool’s bid to be successful. ADM is currently against the deal, so the deal cannot go through even if the rest of the shareholders consent.
SaskPool has suggested that institutional investors and ADM combined form approximately 75 percent of AU shareholders. AU would not confirm these numbers, but did concede that the number of farmers as owners has declined since its 2001 merger. It added that it has not seen any groundswell of support from farmers for the SaskPool proposal, noting that the deal could reduce available facilities and competition.
As for the 2005 negotiations between the two companies, AU said last week that after being approached by SaskPool for talks and the offer of a confidentiality agreement, SaskPool withdrew the promise of a confidentiality agreement and the talks collapsed.
In the meantime, AU continues to grow, announcing last week that it is buying two crop input dealers in Saskatchewan. AU is buying key assets of Green Acres Fertilizer Service (Major) Inc. and Green Acres Chemical Ltd. and Kerrobert Agro Services Ltd., two full-service crop production businesses in western Saskatchewan, effective Dec. 18. AU says the deal complements its existing grain operations at Kindersley, Provost, and Wilke, Sask. Financial terms of the transaction were not disclosed.
“Having recently released record year end earnings, Agricore United continues to execute on its commitment to grow for the benefit of Agricore United’s stakeholders,” says Brian Hayward, AU CEO. “This acquisition aligns with our strategic intent to enhance Agricore United’s grain handling and crop input retail position.”
Green Acres and Kerrobert offer dry bulk fertilizers, liquid fertilizer, a full line of crop protection products and custom spraying services, a full line of bagged and bulk seed products, and agronomic consulting services. AU will be retaining key staff with strong agronomic backgrounds and experience in grain and agro sales and services.
“Green Acres and Kerrobert have been leaders in their marketplace, with a tradition of providing superior customer service and agronomic advice,” says Ron Enns, AU senior vice president. “That’s a tradition consistent with our own corporate philosophy, as Agricore United continues to deliver on adding value to agricultural production.”
Also last week, AU announced plans to invest US$4.0 million in a new 100,000 ton dairy mineral manufacturing plant at Hi-Pro Feeds located in Friona, Texas, and $5.2 million in a new 60,000 mt specialty oat processing plant at its existing seed cleaning plant in Camrose, Alberta.