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Deere seeks to buy Lesco; large Lesco shareholder objects

Featured, News

Equipment giant Deere & Co. said Feb. 19 that it has signed a definitive merger agreement for Deere to acquire Lesco for $14.50 per common share. Based on 9.15 million common shares, this would total $132.6 million.

The Cleveland, Ohio-based Lesco is a supplier of fertilizer, seed, and chemicals for lawn maintenance professionals and golf course superintendents. Upon closing, Deere would group Lesco with its John Deere Landscapes, a 300-store wholesale distributor of irrigation, nursery, lighting, and landscape materials in the United States. John Deere Landscapes is a unit of Deere’s Commercial and Consumer Division.

“This plan is consistent with Deere’s growth aspirations,” said Nate Jones, president, Commercial & Consumer Division. “We seek business opportunities that bring new customers to John Deere and that offer new products and services to our existing customers. We have a strong commitment to serve professional landscaping and golf course customers.”

The transaction will roughly double the number of store locations for John Deere Landscapes with the addition of Lesco’s 332 stores, strengthening its presence across the U.S. and especially in the eastern seaboard states. Deere said the combination will allow its landscapes business to significantly increase the volume of consumable products sold and expand the customer base for both Lesco and John Deere Landscapes, and will complement John Deere’s work in the golf and turf business. Deere believes growing its landscape business will help offset the impact of a softer residential housing market.

Deere’s Commercial and Consumer business had 2006 operating profit of $221 million on sales of $3.9 billion. A break-out for Deere Landscapes was not immediately available. Company-wide, Deere had 2006 net income of $1.7 billion on sales of $10.3 billion.

Lesco President and CEO Jeffrey Rutherford said the deal will enable Lesco shareholders to receive the benefit of efforts to increase shareholder value. However, not all shareholders were in agreement on this point last week.

Hawkshaw Capital Management LLC, which owns 13 percent of Lesco outstanding shares (1.2 million), sent a letter dated Feb. 21 to the Lesco board expressing disapproval of the Deere deal. Hawkshaw, which says it is Lesco’s second largest shareholder, said Lesco’s intrinsic value is significantly higher than what Deere is offering. “The proposed price of $14.50 at best captures the cost synergies available to Deere & Co. as a strategic acquirer, but fails to adequately compensate Lesco shareholders for a return to normal operating earnings and the value creation from continued expansion of the company’s high return on capital retail service center business,” said Hawkshaw Managing Member Frank Byrd. “We do not understand why the board decided to sell Lesco at such an inopportune time: that is, immediately following one of the worst operating years in the company’s history. The issues that precipitated the stock’s decline are, in our view, temporary in nature and largely fixable over the next two years.

“In 2006, Lesco weathered a “perfect storm” that resulted in a greater than 50 percent decline in the company’s share price,” Byrd continued. “Prior to these challenges, the stock had traded as high as $18 per share. We are confident that shareholder value well in excess of $14.50 will be created if the board and current management continue to execute on: 1) rebuilding the direct sales force, 2) avoiding the sizable hedging losses and uneconomic pricing commitments experienced in 2006, and 3) growing the number of high return on capital service centers. Indeed, management has already articulated plans to accomplish these objectives and has publicly reported substantial progress on the sales force effort in particular. Therefore, we question the Board’s decision to sell the company at this time and at this price.

Lesco is yet to officially release results for the year ending Dec. 31, 2006. However, it did post a nine-month loss of $4 million ($.44 per diluted share) on sales of $447.2 million for the period ending Sept. 30, 2006, (GM Nov. 6, p. 11) versus the year-ago loss of $11.1 million ($1.25 per share) and $447.1 million, respectively. Lesco had estimated that it would lose $60 million in 2006 due to its ill-advised disbanding of its direct sales business in 2005. It renewed its efforts at direct sales again in mid-2006.

Lesco also complained last fall that it was suffering due to high contract urea prices and was seeking relief after its urea contract expired at the end of 2006.

Lesco sold its four major manufacturing plants, among other supply chain assets, in late 2005 to Turf Care Supply Corp., (TCS) an affiliate of Platinum Equity, Beverly Hills, Calif. At that time, it agreed to source fertilizer from TCS.

While Deere had not returned calls at press time, its website indicated that in recent years it has sold Nu-Gro sulfur-coated urea and has sourced fertilizer from The Andersons Inc.

Hawkshaw also complained that Lesco did not conduct an open auction process, in which all interested parties might have been given an opportunity to bid for Lesco. It questioned whether the board sufficiently executed its fiduciary duty to ensure maximum value for shareholders and urged the company to facilitate alternative buyers – and, if a better deal is not forthcoming, to keep the company and run it with current management.

Hawkshaw said it would not vote for the deal with Deere.

Deere and Lesco said the deal is subject to customary closing conditions, which will include a vote by Lesco shareholders and regulatory approval. They were expecting the deal to close in the second quarter. The Lesco board unanimously approves the deal and urges other shareholders to do likewise.

Agricore United, JRI plan merger; SaskPool says its bid is still alive

News

Agricore United and James Richardson International Limited said Feb. 21 that they have agreed to combine to create Canada’s largest grain company and a leading global Canadian agri-business. AU shareholders will receive $6.50 in cash and 0.509 shares of the combined company for each limited voting common share. Holders of series A convertible preferred shares of AU will receive $24.00 in cash per share. The AU board will recommend that shareholders accept the JRI offer.

“This transaction delivers significantly greater value to Agricore United shareholders than the hostile takeover bid being put forward by Saskatchewan Wheat Pool,” said Jon Grant, chair of the board special committee reviewing the offer. “Not only does it provide significantly more cash, but the offer also poses a lot less risk. Both parties have mutually determined the synergies and efficiencies to be gained by the transaction, and we both have a thorough understanding of the business plan that will be adopted to achieve those synergies.”

SaskPool said it is currently assessing the proposed AU/JRI transaction. SaskPool President and CEO Mayo Schmidt said, “Our bid for Agricore United is still very much alive. Fundamentals of our proposal provide significant value to both Pool and Agricore shareholders. We are reviewing the information that was announced today and we are confident that a Pool proposal can provide more attractive value to AU shareholders.” SaskPool said it would provide additional information to the market once its assessment is complete. SaskPool currently has a grain handling joint venture with JRI at the Port of Vancouver.

AU says JRI contributes a number of complementary assets and skills to the new company. Its largest market for grain handling and storage is in Saskatchewan and provides a strategic fit for AU’s strong presence in Alberta and Manitoba, such that the geographic and operational diversification of the combined business should ensure it is not overly concentrated in any particular area. In addition, Canbra Foods Ltd, a subsidiary of JRI, is Canada’s largest fully integrated canola oil processor, with crush capacity of 420,000 mt and planned capacity of 1.2 million mt upon completion of a new canola crush plant in Yorkton, Sask.

All three major parties ?Çô AU, JRI, and SaskPool ?Çô are involved in the fertilizer retail business. JRI sells crop inputs at some 64 locations in Western Canada under its Pioneer subsidiary and four under the JRI name in Eastern Canada (two each in Ontario and Quebec). It also owns Green Valley, a blending and packaging facility in Abbotsford, B.C. Agricore sells crop inputs at 83 elevators and 106 stand-alone farm centers in Western Canada, with fiscal 2005 volume sales of 994,000 mt (GM Nov. 13, p. 9-10). SaskPool has 100 outlets with fiscal 2005 volume sales of 618,000 mt.

The new company will be called Richardson Agricore Ltd. The two parties say it will create:

  • Canada’s largest grain company, with annual grain shipments in excess of 14 million tons and an established presence in 50 countries.
  • A company with diversified earnings from grain handling, crop production services, livestock services, oilseed processing, and financial services.
  • Combined assets strategically located throughout both western and eastern Canada, as well as in the United States and Japan.
  • Significant synergies, currently estimated to be about $62 million per year. The synergies will come from realizing efficiencies in overlapping operations, applying best practices to the combined company’s operations, and reducing overhead costs. Expected net integration and one-time transaction costs are estimated to be about $31 million.
  • A financially strong company, with pro forma gross sales of about $5 billion for the trailing twelve months ending January 31, 2007, and pro forma earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $226 million for the same period. Pro forma EBITDA including annualized adjustments and expected synergies is estimated to be $296 million. Pro forma net average debt of the combined company is about $700 million.
  • A company with the size and financial strength to take advantage of significant growth opportunities.

As part of the transaction, James Richardson & Sons Limited (JRSL), the parent company of JRI, will contribute $125 million of cash, and Ontario Teachers’ Pension Plan (OTPP) will contribute $266 million of cash to fund the cash portion of the offer. On completion of the transaction, the total issued and outstanding shares of the combined company will be about 103.9 million, with JRSL and OTPP owning 50.5 percent and 20 percent, respectively. The existing holders of AU shares will own 29.5 percent in addition to receiving an aggregate of $391 million of cash.

The board of the new company will be comprised of 11 directors, to be elected by the shareholders. JRSL and OTPP have agreed to support the election to the board of certain individuals. It is expected that the initial board will include three nominee representatives of JRSL, two independent directors initially selected by OTPP and thereafter nominated by the independent nominating committee and approved by OTPP, two producer representatives, two additional directors nominated by JRSL who will be independent under applicable Canadian securities laws, one independent director nominated by consensus of JRSL and OTPP, and the CEO of the combined company. The board will be chaired by current JRI Chairman Hartley Richardson. In the interim, Curt Vossen will continue to act as JRI president, and Brian Hayward will continue to act as AU CEO; they will also co-chair a transition committee. Upon closing of the transaction, Vossen will assume the role of Richardson Agricore CEO.

Archer Daniels Midland Co., which owns 28 percent of AU, has agreed to vote for any merger approved by the AU board, unless prior to its expiration ADM makes its own proposal which is greater than the takeover bid.

The offer remains subject to certain conditions, including the tender of at least 75 percent of AU’s shares and the receipt of regulatory clearances. The deal also includes a termination fee payable to JRI of $24 million in certain circumstances, and a right on the part of JRSL and JRI to match a superior proposal. The transaction is expected to be completed in mid-2007.

Manitoba unveils $15 M potash exploration plan

News Briefs, Potash

Winnipeg-Manitoba Science, Technology, Energy and Mines Minister Jim Rondeau announced Feb. 23 that global resources company BHP Billiton will invest $15 million to explore the potential of a large potash deposit in the Russell-Binscarth area. “Manitoba’s untapped potash deposits have the potential to generate hundreds of jobs and attract millions of dollars in direct investment,” Rondeau said. “BHP Billiton is the largest diversified resources company in the world with the capability to properly assess the Russell-Binscarth deposit at no additional cost to Manitobans.” The deposit is owned by the province of Manitoba (49 percent) and Potamine Corp. of Canada (51 percent) as joint partners in the Manitoba Potash Corp. (MPC). MPC was created in 1986 to hold the assets of the Russell-Binscarth potash project. BHP Billiton has recently bought out Potamine’s share in the MPC.

Intrepid mine at full capacity; new dome in works

Carlsbad, NM, News Briefs

Carlsbad-Intrepid Potash on Feb. 22 announced progress with its East and West facilities in Carlsbad. Intrepid said that after 60 days of production downtime in the fourth quarter of 2006, it recently returned to full capacity at its West mine. Intrepid said the voluntary shutdowns in late 2006 were taken to repair shaft damage created by water incursions that resulted from excessive rains due to Hurricane John, and to prevent any future potential impacts from water incursions. As part of the mitigation efforts, dewatering wells have also been installed, water collection systems improved, and abandoned utilities removed from the shaft. Intrepid also said it made significant improvements to its compaction plant at the North facility. During the production outage, Intrepid used existing inventories to meet customer demand. The East mine, also at Carlsbad, recently inflated the “roof bubble” on the first of six new dome warehouses that will replace the existing warehouse, which was damaged by a microburst in April 2006. Intrepid said progress on the reconstruction is proceeding satisfactorily and production at the East mine has not been impacted. The first new dome warehouse should be in operation by April 2007.

Agronomy the weak point for LOL in 2006

News Briefs

Arden Hills, Minn.-Land O’Lakes Inc. reported measurable improved performance in all business segments in 2006 except for agronomy, which is primarily composed of its 50 percent stake in Agriliance LLC. For the fourth quarter ending Dec. 31, 2006, LOL’s agronomy segment saw a $16.3 million pretax loss, versus a year-ago $20 million pretax loss. For the year, agronomy had pretax earnings of $11.8 million versus 2005’s $95.5 million, though the latter included a $73.5 million pretax gain off the sale of shares in CF Industries Inc. LOL noted that crop nutrient volumes and margins were depressed in 2006 due to a late planting season and early uncertainty over nitrogen prices. It also said the devaluation in crop protection products poses a continuing challenge. LOL-wide, the company reported fourth-quarter 2006 net income of $44.5 million on sales of $1.9 billion, versus the year-ago loss of $1.6 million on sales of $2 billion. For the year 2006, LOL reported net income of $88.7 million on sales of $7.3 billion, versus the year-ago $129 million and $7.6 billion. Again, the sale of CF shares impacted 2005 results.

New plant to turn food wastes into fertilizer

News Briefs

Woodbridge, N.J.-Converted Organics Inc. has completed financing for its initial facility, to be located at Woodbridge, for producing an organic fertilizer for agriculture, horticulture, and turf markets from a variety of food wastes. President and CEO Edward Gildea stated that a $17.5 million tax-exempt New Jersey Economic Development Authority solid waste revenue bond has been completed to provide the revenue, along with a $9.9 million initial public stock offering for the first commercial North American plant to license recycling technology from International Bio Recovery Corp. of North Vancouver, BC. “We have already begun to establish relationships with customers on the East Coast, and this offering will facilitate the company’s development and growth,” said Gildea. He said unlike other processes, International Bio Recovery’s method is able to continually and successfully convert mixed waste materials containing up to 10 percent non-biodegradables.

Organic fertilizer company off to fast start

News Briefs

Alpharetta, Ga.-Advanced Growing Systems Inc., which just started into the organic fertilizer and nursery business last spring, posted sales of $565,000 for the traditionally slow month of January and announced that it will report month-over-month and year-to-date sales comparisons to appeal to investors. Its two companies are Organic Growing Systems Inc., which manufactures a scientifically advanced organic fertilizer, and Advanced Nurseries Inc., which has a wholesale group of commercial nurseries in the Southeast. Another nursery is planned for the metro Atlanta area.

Doyle eyes much higher prices for Brazil

News Briefs

Saskatoon-Potash Corp. of Saskatchewan Inc. President and CEO Bill Doyle told analysts at the Morgan Stanley Basic Materials Conference that he was not particularly crazy about the $5/mt increase negotiated by Belarusian Potash Co. with the Chinese over potash. He said money was left on the table. Not all is lost though, as Doyle believes potash prices to Brazil could go up $100/mt. He said a $60/mt increase has already been identified. Meanwhile, in North America, Doyle says his company has increased its market share as Agrium Inc. and The Mosaic Co. have had to allot tons to Canpotex that they might have sent to North America. He said the two have to meet their Canpotex quotas or risk seeing them decline. Doyle was skeptical that U.S. corn acreage can get as high as 90 million acres in 2007, as some have speculated. He said he had a hard time finding those extra acres. However, he does go along with many, who eye a more conservative corn acreage of 86-87 million. He sees soybeans at 66 million. He said the added corn acres will come from soybeans.

Virginia fertilizer preemption expected to pass

News Briefs

Richmond, Va.-Agriculture interests, along with others, have strong hopes for a bill in this session of the Virginia general assembly to limit local authority to regulate fertilizers. The measure (SB1061) was introduced at the request of the agribusiness industry, and is supported by the Virginia Turfgrass Council and others. “The bill restricts localities from regulating the registration, packaging, labeling, sale or distribution of fertilizers, leaving this authority with the state,” said Virginia Agribusiness Council’s Donna Pugh Johnson. The Turfgrass Council said the bill will benefit all who make, sell and use fertilizer by preventing any and every town from making different rules restricting and banning the sale and use of fertilizer products. Both groups also applauded tabling of another bill (HB 2663) prohibiting excessive application of pesticides and fertilizers. “While we do not condone excess application of fertilizers, this proposal did not provide a reasonable solution,” Johnson said.

No preemption law as yet for Michigan

Great Lakes, News Briefs

Lansing, Mich.-The fate of legislation to remove local control over fertilizer use is unresolved in Michigan after the question was dropped in the closing days of the state legislature in December, according to agriculture interests. “The local preemption language was stripped from the bill on the Senate floor,” Michigan Agri-Business Association Policy Director Bob Tadsen told Green Markets. “There was talk about reinserting similar preemption language in the House, but negotiations failed.” Tadsen added that at this point the association is not planning to do anything more with the issue in the upcoming session. Michigan Farm Bureau officials were also disappointed to see the preemption taken out of the bill, but FB Legislative Counsel Tonia Ritter said it’s her “gut instinct that we’ll see it introduced again.” Ritter said the state’s right-to-farm law provides some protection for agriculture, but believes that it should be shored up with preemption legislation. Some sentiment emerged during last session’s deliberations over the fertilizer legislation for a statewide reduction in phosphorus use, including non-agricultural products such as dishwasher detergent. April Hunt of the state agriculture department indicated that a committee is dealing with the phosphorus question at the state level. Hunt, fertilizer and bulk storage manager, said that the bill that finally passed the legislature represented the first substantial revision in fertilizer regulations since 1975. No major changes were made, she noted, but rules were adopted banning application on frozen turf and requiring setbacks from waterways. She said new bulk storage rules are being implemented with dealers, and that similar requirements will be phased in with farmers through 2008.