The battle for control of Australia’s largest food manufacturer finally appears to be over, after an acrimonious three month fight. Now the hard part begins, says David Robertson.
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Burns Philp, the yeast and spices company that is majority-owned by New Zealander Graeme Hart, has 67% of Goodman Fielder’s stock, and rising. The company is expected to have at least 90% by the 28 March deadline, when it will enforce a compulsory buyback of outstanding shares and delist Goodman Fielder.
It has not been an easy takeover, however. Burns Philp, which by market capitalisation is about a quarter of Goodman’s size, announced it would take a tilt at the bread and spreads maker last December.
The A$1.9bn (US$1.13bn) offer valued Goodman Fielder at about $1.81 a share, or $1.61 excluding recent dividend payments; Goodman had been trading at around $1.50 a share but immediately shot up to the $1.80 bid price before falling back to about $1.65. The Goodman Fielder board rejected the offer, claiming it was insufficient considering the company’s stable of brands, which includes Uncle Tobys, Praise and Buttercup.
Touting around for a higher bidder
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By GlobalDataGoodman’s corporate adviser, Macquarie Bank, approached numerous potential rival bidders, hoping to jack up the price through an auction. Kraft, General Mills, Cargill, Nestlé and PepsiCo are all thought to have talked to Macquarie but nobody was willing to match the Burns Philp offer. A number of private equity firms also expressed interest, but only in individual divisions of the Goodman operation.
By the end of February the Goodman board announced that it was no longer looking for a white knight but would continue to recommend to shareholders that they reject the Burns deal. Clearly, the company could not get a good price for its units (there were also tax issues to be considered with any partial sell-off) and instead Goodman’s directors rammed home the message that this was an improving company.
‘Jam tomorrow’ rarely appeals
But the “we’re getting there” message is never easy to sell – of all companies, a food manufacturer should understand the unpopular concept of jam tomorrow. Eventually Goodman Fielder was forced to accept that all it could do was attempt to sweeten the bid price, hopefully by between 5c and 10c a share.
“Their defence was based around trying to get a higher price but they were unable to put forward a good argument because they had no expert valuation of their company,” said a source close to the deal. “They were comparing themselves with other international food manufacturers, which wasn’t very convincing. They painted themselves into a corner as they had no evidence to support their claim that they deserved a higher price.” Finally, last week, Burns Philp stumped up a measly 2c a share extra to lift the bid price to $1.63 at an extra cost of just $19m.
Having already raised $1.9bn from bankers to initiate the bid, clearly an extra $19m was not much of a hurdle. It did, however, allow the Goodman Fielder directors to claim that they had been right to fight on for a higher price – a somewhat hollow victory.
Creating the region’s largest food producer
Assuming that Burns reaches its 90% target, and there is now no reason to think that it won’t, the new entity will be the region’s largest food producer with $4bn in annual revenues and pre-tax earnings of more than $600m. A spokesman for Burns Philp says that Hart will run the merged company as one, and has no plans at this stage to sell any of the Goodman divisions. A major review will be initiated, which Burns says should cut costs by $50m, although analysts expect $150m could be a more realistic number.
Four Goodman directors have already gone, to be replaced by Burns Philp men. Chairman Keith Barton has been replaced but remains on the board and no decision has been made on the future of chief executive Tom Park.
Longer term Hart is hoping to use Burns Philps’ greater geographic spread to move Goodman’s supermarket-friendly brands further afield. UBS Warburg, in a recent research note, also pointed out that the merger would give Burns less volatility in its earnings as more will come from the Australian market. It will also reduce uncertain South American sales from 12% to 4% of the total.
“Assuming a successful acquisition, BPC’s revenues and earnings will be more diverse with branded consumer products and Asia Pacific becoming the dominant earnings category and region representing 70%,” the bank said.
The turnaround begins…
With the battle for control now, seemingly, over the real job begins. Graeme Hart has a looming debt pile of $2.7bn, which cannot be ignored, but his real task will be making a company that has underperformed for years an exciting and vibrant organisation. Good luck.
