The transformation of the Burns Philp food group in Australia must rank as one of the most remarkable of the last decade. Every analyst in Australia is now paying close attention to what chairman Graeme Hart will do with the company’s AUD2bn war chest. David Robertson reports.

How quickly things can change. Around the time stockmarkets were becoming irrationally exuberant about start-up dotcom companies the 123-year old Burns Philp, at that point the world’s largest supplier of yeast products, was struggling with AUD1.6bn (US$1.18bn) of debt and a market capitalisation just one tenth of that.

But over the next few years the dotcoms went bust while Burns Philp restructured and started buying other companies to become the largest food group in Australasia. However, the magic corporate yeast that was added to Burns Philp to make it grow so fast has now gone into reverse and the company is divesting all its assets and by the middle of this year it is likely to own little more than a sizeable bank account.

Burns Philp has been on an amazing ride and the man responsible for it all is New Zealand billionaire Graeme Hart. After leaving school aged 16 to become a tow-truck driver, Hart first invested in the struggling yeast and spices group, Burns Philp, in 1997. He bought 19.9% of the company for AUD263m and then watched the share price collapse from AUD2.36 to 30c four months later. A year after that, as the banks demanded repayment of the company’s AUD1.6bn debt, the share price was 4c.

Hart faced ruin but he managed to convince the banks to hold off as he increased his stake to 54% and set about stripping costs: he cut staff numbers, reduced the number of products, closed factories and dumped unprofitable clients. By 2001-02, Burns Philp had bounced back and reported net profits of AUD146m.

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Then, in 2002, Hart launched an outrageous AUD2.6bn bid for a company four times the size of Burns Philp. Goodman Fielder owned a number of bread and cereal brands but the company had been underperforming for years and many institutional investors loathed holding such a dull stock. Hart eventually won control after a bitter takeover battle.

At the time, just-food wished Hart luck in his attempt to turn Goodman Fielder around as it was clear that he would need to do something special with the merged company if he was to pay off the enormous debt he’d taken on making the acquisition. Apparently Hart has succeeded.

Last November 80% of Goodman Fielder was refloated on the Australian stock market for AUD2.8bn. The float did not include the yeast division, which was sold to Associated British Foods for AUD1.9bn in 2004.

Burns Philp now owns a couple of old Goodman Fielder brands, 20% of Goodman Fielder and has approximately AUD2bn in cash. Graeme Hart has not only turned around both Burns Philp and Goodman Fielder but also made a fortune in the process.

However, the transformation of Burns Philp is not complete. The two brands it has retained, Uncle Toby’s and Bluebird, were always the most attractive part of the old Goodman Fielder and now these too are up for sale. Uncle Toby’s is a cereal and nutritious snack-food maker that rivals have been hoping to get their hands on for years. Analysts expect Nestle, Kraft, PepsiCo, Unilever and a couple of local companies to make a strong run for Uncle Toby’s and Bluebird as they are well established and occupy growth segments.

Macquarie Bank recently suggested that Burns Philp’s snacks division could fetch between AUD1.1bn and AUD1.7bn with other analysts predicting it will be at the higher end of that scale. “In our view,” analysts at Goldman Sachs JB Were said, “the snacks business would be highly attractive to other consumer brand groups. It occupies relatively fast-growing food categories and has strong brand positions.”

Analysts believe an industry buyer is more likely than a venture capitalist as food companies will be able to extract synergies. Nestlé, for one, is hotly tipped as a contender as it is believed to be keen to increase its presence in Australia.

There was some surprise last week when Burns Philp announced that the snack division’s first-half profits were down 17.5% to AUD34.4m.

Burns Philp chief executive (and Hart confidante) Tom Degnan insisted that both sales and profits would rebound in the second half when a range of new products was released. He said: “Not only are they [the new products] going to keep us in the 41-42% [market] share area, but I think it’s going to stimulate some category growth.”

The poorer than expected snack results may be the reason that Degnan was less forthcoming about potential buyers than some analysts had expected. Degnan insisted that Burns Philp wouldn’t rush to sell: “We don’t have to do anything rash.”

Degnan’s reluctance to commit to a timetable may also be linked to rumours that Burns Philp will buy New Zealand snack-maker Griffin, in which case the snack sell-off will likely be delayed another year.

But assuming that the snacks division is eventually bought, Burns Philp will effectively be out of the food business. Instead, it will have a very large pile of money and every analyst in Australia is paying close attention to what Graeme Hart does next.

Analysts at ABN Amro said: “Burns Philp could afford an acquisition of AUD15bn. Without knowing specific targets, management’s track record suggests a likely acquisition will add value.”

Hart’s reputation has been so well burnished by what he has achieved with Goodman Fielder and Burns Philp that investors are keenly anticipating his next move, but so far the Hart team is keeping quiet.

Degnan said: “We are looking for companies with stable, defensible cash flows that have very strong market positions… where we can add value and where we can get it at the right price. While we may go beyond food, we won’t really go out of what we consider our mandate in terms of the type of company.”

Hart’s private investment company, Rank, has already bought nearly 90% of forest and paper group Carter Holt Harvey and many analysts think Burns Philp will simply become another investment vehicle.

So, in less than ten years Burns Philp has gone from struggling with more debt than assets to being the biggest food group in Australasia to being the fattest chequebook around. That is quite a radical change for a former yeast producer.