Capital Investment in Agribusiness Forum

6 December 1996

Agribusiness Association of Australia in Conjunction with KPMG & Loftus Capital Partners Pty Ltd.

Summary

1. Funding Structures that have changed as a Result of Market Forces.

Case Study - PIVOT Ltd. John Abernethy, Executive Director, Loftus Capital Partners Pty Ltd.

SUMMARY

• PIVOT Ltd. is a fertilizer manufacturer. It developed on a cooperative basis and shares were seldom adjusted. The company was experiencing increasing asset backing per share and rapidly escalating franking credits. It has a powerful customer/shareholder base and was becoming attractive to "raiders".
• PIVOT Ltd. is now a profitable publicly listed company with 45,000 shareholders. Share price is $50.00, NTA is $2.80. It is well regarded as a good corporate citizen with excellent potential for growth.
• Management of PIVOT Ltd. wanted to restructure the company to better reflect the true and fair value of its shares by raising money from capital markets.
• An objection was made by one shareholder, who owns only 50 shares. Under legislation, the restructure is held up and PIVOT must pay all of his legal expenses.
• Potential for company growth would have been in the vicinity of $250 million.

ISSUES

• A small minority is holding up the restructure of a major public company and causing a major disservice to the country.
• The existing company law is causing a major impediment to company growth and to Australia.

2. Funding Structures that have changed as a Result of Market Forces.

Case Study - Dairy Vale Foods Ltd. Jock Osborne, Finance Manager and Company Secretary, Dairy Vale Foods, Philip Roberts, Executive Director and Carolyne Burns, Executive, Baron Partners Ltd.

SUMMARY

• Dairy Vale Cooperative was formed in South Australia in 1949 and over the years grew through a series of mergers and acquisitions into a successful regional dairy process with approximately 45% of the South Australian milk market.
• The Cooperative operated in a highly regulated industry where prices were set by government regulation. The profit market was regulated, providing little incentive to be innovative or efficient. Company culture reflected a traditional bureaucratic style.
• Following further acquisitions, Dairy Vale began to acquire an uncomfortable amount of debt. Although the cooperative was trading profitably, it was faced with the impending deregulation of milk prices. It also required capital to invest in plant.
• Baron Partners were engaged to undertake a major survey of the Australian dairy industry and to advise on future strategy for Dairy Vale.
• The Board decided that the business had a viable future as an independent dairy processor if it could restructure to enable new capital while protecting the interest of the farmers.
• Baron Partners developed the new proposal. Dairy Vale Investment Trust (DVIT) was created specifically to participate in the restructuring which was designed to balance the interests of the former members of Dairy Vale Cooperative Ltd., the milk suppliers to the business and the investors who provided the capital.
• The new structure comprises Dairy Vale Ltd., Dairy Vale Investment Trust and the Dairy Vale Farmers’ Cooperative Ltd. See attached structure and description.
• The DVIT plays a major part in the overall success of the restructure. It provides shareholders with a mechanism whereby they can gain easy access and liquidity for their shares through the market whilst also enabling new investors to participate in the Dairy Vale business.
• Previously members of the cooperative had no open market for their shares and member’s shareholdings were restricted in number to 50,000 shares. If they ceased to be a member or stopped dairying, under the Cooperative Articles they were forced to redeem all their shareholdings at the total nominal value of $1.00 per share.
• Dairy Vale shareholders now can obtain marketable securities for their shareholdings at any time by exercising their share exchange right which involves exchanging their shares for listed units in the Trust on a one for one basis. When shareholders convert their shares into units they now have the option of selling their shares at the prevailing price.
• The restructure has resulted in shareholders obtaining four new shares which equate to four Trust units - so the restructure unlocked the value of Dairy Vale by converting the previous $1.00 redemption value to around three dollars forty at the current market price of the Trust units.

RESULTS

• Dairy Vale shareholders have taken advantage of the exchange right mechanism to convert their shares into units in the Trust to gain access to funds to meet their specific needs.
• When the Trust was originally quoted on the ASX it held around 12.7 million ordinary shares or a 35.6% interest in Dairy Vale. At the end of November 1996 the Trust held 17.4 million ordinary shares or a 48.8% interest in Dairy Vale.
• Shareholders approaching Dairy Vale to exchange shares for units in the Trust could have exchanged 6.4 million shares but in fact have exercised that right only to the extent of 4.7 million shares, suggesting that they wish to maintain their long term interest in Dairy Vale itself.
• Previously shareholders could not own more than 50,000 shares. As the Trust is listed on the ASX Dairy Vale shareholders are now able to continue to maintain an interest in the underlying Dairy Vale Foods business and are able to acquire on-market any number of units in the Trust to increase that interest. Through their Trust unit holdings they are able to gain access to Dairy Vale dividends.
• The Trust listing has also allowed other parties interested in the dairy industry to acquire direct interest in the operating business of Dairy Vale.

ISSUES

• The restructure had to be attractive to new investors as well as existing members. This was a daunting task for Baron partners who had to satisfy owners, investors and regulatory bodies.
• Difficulties were experienced with shaping a new culture given the strong emotional attachments to the old cooperative and suspicions of outside bodies such as Baron Partners. Parties involved in the process were too focussed on control.
• The overall approval process took twelve months - too long a time, as Australia needs to move much more quickly. ASX requirements require amendment.
• The true underlying performance of Dairy Vale has increased measurably. They are now concentrating on getting the core business right.

3. Requirements for Investment in Agribusiness

The Stock Exchange View. Michael Costello, Deputy Managing Director, Australian Stock Exchange

• Mining and resources dominate the ASX. Agribusiness represents only $6.7 billion or less than 1.8% of the market (out of 1,181 listed companies, only 36 are agribusiness related)
• Although there is a growing interest in the food and fibre industries, capital is difficult to obtain. Much of the investment in the sector is with unlisted private companies or cooperatives.
• Analysis of public agribusiness companies suggests that they perform no worse than Australian public companies in general. Little is known about private agribusiness companies, as they do not have publicly available annual reports or other data. Similarly there is a lack of information on cooperatives’ performance.
• There is a common perception that the investment community’s attitude to agribusiness is adversely affected by seasonal factors. Investment decisions also reflect the attitudes of individual, generally non-rural investors.
• There are a number of companies wanting to invest in agribusiness but finding difficulties because of the large proportion of private and cooperative companies, neither of which tend to seek outside investment - or control.
• Overseas investors place value in Australian agribusiness. There are sound, long term reasons why the Australian business sector is attracting the attention of international firms and this will remain a feature of the industry.
• Australian companies wishing to retain and identity must either seek an appropriate international relationship or exploit a marketing niche and, in either case, will require world class management.
• The investment community and Government will have a role to play in bringing about an active and effective agribusiness sector, by influencing the quality and skills of management necessary for an industry with a more international focus.
• In particular, while mush export activity is being undertaken by cooperatives, it rests on the attitudes and skills of their supplier shareholders, their boards and management, to ensure that international competitiveness can be sustained.

The above summary is based on a draft discussion paper prepared by Michael Costello for the Agribusiness forum

THE ASX

• The ASX decided to take "its own advice" and recently restructured to become a company with limited shares tradable. The ASX is the first exchange in the world to become a publicly listed company. They are listed 'by themselves for themselves'.
• The ASX faces similar problems to the agribusiness industry - that of giving up control. The organisation wants investment but does not want to give voting rights.
• With deregulation and improved technology, trading overseas is almost instantaneous. It is economically very important to be exposed to foreign competition.
• The ASX needed a structure to act quickly. The former structure was slower with the needs of members being more important than long term strategy. 75% voted to change strategic direction. Members will receive shares but must retain them to have a say. The ASX will be better placed to raise capital, act quickly and strategically. It will not be as big as other international stock exchanges but it will have the capacity to move faster.
• The ASX now needs to be customer focussed, instead of being focussed on the stockbrokers.

ISSUES

• Is there a need for the ASX in light of the trend for globalization of markets and improved telecommunications?
• In time foreigner will be more able to participate in the ASX. However they will need to come to Australia for expert analysts.
• If agribusiness is able to perform better then there must have better capital connections - joint ventures. Under the Supermarket to Asia strategy a working group will be formed to look into the issues of investment in agribusiness.
• Investors have had serious problems with agribusiness. Cyclical trends and lumpy conditions make it hard to manage.
• It is a myth that if you have the majority share then you have control of the business. Control is through the customers.