Elders to shed rural division

Melissa WilliamsCountryman

Further consolidation in the Australian agribusiness sector is imminent with debt-ridden Elders this week revealing plans to sell its main rural services division to return value to shareholders.

The company's announcement to the Australian Stock Exchange on Monday that it would start a process to sell Elders Rural Services came just weeks after it rebuffed a merger proposal from its biggest shareholder, Ruralco, and coincides with moves to sell its Futuris Automotive division.

A merger between Elders and Ruralco would have created an agribusiness company with an estimated market capitalisation of $500 million.

Ruralco managing director John Maher said this week his company might continue to pursue an acquisition of Elders Rural Services, but would now wait to see how the sale process played out and closely analyse Elders' financial results, due for release on November 19.

He disputed that Elders' latest move to sell its biggest business unit would create value for Elders shareholders.

Mr Maher said the sale of Elders Rural Services would actually be detrimental to the company's shareholders compared to Ruralco's initial proposal that centred on capital raising under a 'nil premium' merger.

Elders reported its debt levels at $375 million in March this year, but company chief executive Malcolm Jackman said the sale of some assets had since reduced this.

He would not comment on the company's current level of debt, except to say it was lower than $375 million and higher than some industry reports of $175 million.

Elders has been struggling under significant debt burdens since its failed recapitalisation process in 2009 and has been divesting assets to try to improve the performance of its rural services division.

Mr Jackman said it was too premature to publicly release the amount of debt maturities that were due at the end of 2012.

Elders' share price fell one cent to 24.5c after the company's announcement on Monday. At this level, it is down from about 63c two years ago and well down on 2007 peak values above $27.

Mr Jackman said the factors that had changed since Ruralco approached Elders in early September to merge the rural services of both organisations and this week's announcement by the company included recent takeover activity in the agribusiness sector.

"What has not changed is our board's strategy to become a 'pure play' rural services business that will create value for shareholders over time," he said. "But the board believes it is inevitable that it will continue to get bids, as indicated by the recent Ruralco approach and GrainCorp becoming a target for US company Archer Daniels Midland.

"It is hard to respond to a takeover and we would rather be in control of the (sale) process."

Mr Jackman said there had been interest from several parties in the acquisition of Elders Rural Services, although he would not comment whether this was coming from Australian or foreign investors.

He said through the sales process, any groups thinking they had a solution to Elders' equity issues could make an approach.

Mr Jackman said a third-party group would be contracted to prepare an information memorandum that could be distributed to interested buyers before Christmas, but formal bids were not expected to be received until early 2013.

Elders shareholders would need to approve any buy-out and there are various estimates of the company's takeover value, ranging from $250 million to $350 million.

Mr Jackman said, in the meantime, Elders was continuing to discuss its re-financing options with its bankers.

But he said it was inevitable there would be structural change to the company in the future.

Once Elders Rural Services was sold, the company could exist as an operating business but would have few assets left.

Mr Jackman said it was too early to speculate on potential advantages or pitfalls for the Australian agricultural sector stemming from an Elders-Ruralco merger or takeover, as the sales process had just started.

He said Elders staff, estimated to number about 2400 across Australia, had been notified of the sale of the company's rural division on Monday.

With Elders operating 230 rural branches, 94 real estate and insurance outlets and 157 real estate franchises nationally, there are obvious symmetries with Ruralco.

Both companies provide a range of farming services and supplies in the livestock, grain, wool, real estate, insurance and banking sectors and together would create a greater challenge to bigger rival Landmark, which is owned by Canadian based Agrium.

Ruralco is the biggest Australian-owned agribusiness company on a market capitalisation basis, with a network of 500 outlets, 40 businesses under its umbrella and sales worth $1 billion in 2011.

It made its first move on Elders in June this year, securing a 10 per cent stake for about $10 million to take its total shareholding to 12.04 per cent.

Then last month Ruralco proposed a merger with Elders Rural Services that it said would benefit shareholders in both companies and create a 'pure play' single entity rural services company with sustainable debt levels that would be attractive to institutional investors.

For restructuring of the Elders business, Ruralco suggested a demerger or 'held for sale' structure that reduced Elders' shareholder exposure to the sale of the company's automotive and forestry divisions.

Mr Maher said this proposal was detailed but was knocked back by the Elders board, which replied to Ruralco saying 'now is not the right time to consider merger or sale of the Rural Services business' and called for more detail from the group.

He said his company was now re-considering its position and could move on Elders Rural Services alone or in conjunction with other investors. He would not comment on the company's likely takeover value.

"If we can forge a merger, it will benefit Australian agriculture and farmers," he said.

"There will be synergies on a cost and revenue basis and we would be better able to pass cost savings back to producers.

"And a bigger joint-venture entity could compete with Landmark more effectively. It would give us critical mass and a balance sheet to make us more competitive."

Mr Maher said any merger or takeover of Elders Rural Services by Ruralco would require approval from the Australian Competition and Consumer Commission and shareholders from both companies.

It was expected by many industry players that the Elders name would continue, because it was among the best known brands in the agricultural sector.

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