Country Bird Holdings’ bid for fellow South African poultry group Sovereign Food Investments has been judged to be “fair and reasonable”, the takeover target said today (19 August).

Financial advisors at South Africa-based Mazars Corporate Finance have given their evaluation of Country Bird’s ZAR9-a-share offer to the Sovereign Food Investments board.

Privately-held Country Bird and so-called “concert parties” own just short of 10% of Sovereign Food Investments. Country Bird tabled a bid for the rest of Sovereign Food Investments last month.

In a letter sent to Sovereign Food Investments on Monday (15 August), published today, Mazars Corporate Finance director Anoop Ninan said the offer represented a premium of 25.2% on the company’s share price on 6 July, the last trading day before the Country Bird offer was announced.

Mazars Corporate Finance valued Sovereign Food Investments’ shares between ZAR8.31 and ZAR8.79.

“Our opinion [of the offer] is based upon the market, regulatory and trading conditions as they currently exist and can only be evaluated at the date of this report. It should be understood that subsequent developments may affect our opinion, which we are under no obligation to update, revise or re-affirm,” Ninan added.

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Setting out its offer on 6 July, Country Bird said it believes a takeover of Sovereign Food Investments would give the target’s shareholders an “opportunity to divest their shares at an attractive premium” amid drought conditions in South Africa, rising input costs and pressure from poultry imports.

Country Bird’s offer for Sovereign Food Investments comes against the backdrop of the takeover target’s bid to implement a black economic empowerment scheme. The scheme, put forward at the end of last year, has been opposed by a block of shareholders, including Country Bird, who believed the scheme would have entrenched the control of the business in the hands of the Sovereign Food Investments’ management team. The scheme involved a buyback of Sovereign Food Investments’ shares representing 5% of its stock.

The Country Bird offer came just days before a shareholder vote on the scheme, after a number of attempts, was due. 

On 26 July, Sovereign Food Investments said the latest vote had been put back to October.

In today’s circular, Sovereign Food Investments said an “independent board” of the company’s directors set up to consider the Country Bird offer has “placed reliance” on the opinion of Mazars Corporate Finance and is “unanimously of the opinion that the offer consideration is fair and reasonable to eligible shareholders”.

However, today’s circular also set out the independent board’s views on a series of factors for Sovereign Food Investments’ shareholders to “make an informed decision” on the Country Bird offer, including on the planned black economic empowerment scheme, on industry consolidation and on the value and timing of the bid.

“As a direct result of the actions taken by CBH and the concert parties, the BEE transaction has not yet been implemented and the potential benefits which the independent board believes will accrue to Sovereign once it becomes a black empowered poultry producer in a competitive market, have not yet materialised,” the circular read.

The Sovereign Food Investments independent board has also noted in Country Bird used the “benefits of industry consolidation” as rationale for its interest in the company. However, the circular said independent board “believes that Sovereign is well placed to benefit from potential industry failures and that Sovereign does not need the offer to benefit from same”.

The circular read: “In fact, should CBH succeed with its offer by potentially acquiring 100% of the equity of Sovereign, it is CBH and its shareholders, and not Sovereign shareholders, that will benefit from consolidation and a potential upturn in trading conditions. The independent board therefore cannot ascribe any benefits to consolidation (including the benefits of synergies) in favour of eligible shareholders. All of these benefits will ultimately befall CBH and its shareholders.

“Eligible shareholders are therefore cautioned to carefully consider the statements made by CBH, the media and certain industry commentators in favour of industry consolidation. Whilst cost savings and synergies could be extracted by CBH upon acquiring the entire issued share capital of Sovereign, the independent board does not believe the offer consideration to adequately reflect or remunerate eligible shareholders for the benefits that will accrue to CBH’s business.”

Sovereign Food Investments’ independent board also cautioned the company could itself benefit from a recovery in South Africa’s poultry sector, which has been hit by the recent drought and by fierce competition from imports.

“It is generally accepted that the South African poultry sector is cyclical and goes through periods where certain factors collectively have a greater negative impact on trading conditions and sector outlook than in the ordinary course of trading. The independent board, supported by external data points and information, including CBH’s views and the views of a large competitor such as Astral Foods, believes that the sector is currently experiencing such cyclical conditions,” the circular read. “Eligible shareholders with a medium to longer term investment horizon should bear in mind the potential positive impact that a sector recovery could have on the valuation of Sovereign’s shares and the impact that the current trading conditions have had on the valuation range expressed in the fairness opinion [from Mazars Corporate Finance].”

Despite the circular stating Sovereign Food Investments’ independent board was “unanimously of the opinion that the offer consideration is fair and reasonable to eligible shareholders”, it also appeared to present concerns on the board about the methodology used by Mazars Corporate Finance to value the company’s shares. The financial advisory firm carried out an indicative valuation of Sovereign using the discounted free cash flow (DCF) method.

“The independent board is of the opinion that the management forecasts utilised in the DCF valuation reflect the status quo and current market conditions. The … valuation is therefore not representative of a potential cyclical upturn nor the full potential benefits which may be derived from implementation of the BEE transaction,” the circular read.

Sovereign has incurred significant costs to position the business favourably for a cyclical upturn, specifically in the context of Sovereign’s continued progress made towards increasing higher margin product mix. The independent board therefore believes that the timing of the offer is opportunistic and that eligible shareholders that have acquired their Sovereign shares for medium to long-term value appreciation should consider the above-mentioned factors in their assessment of the offer.”