Big guys at the gate

For much of the 1990s and early 2000s agribusinesses, most of which trade their unlisted stock on over-the-counter platforms, were tagged as longterm value plays. The shares traded at deep discounts to their already conservatively compiled balance sheets.

The truth is that it can take years (perhaps decades) for the full value reflected on the balance sheet to be realised for shareholders. And while investors wait for the value, they often suffer the vagaries of inconsistent operational performance, especially among the smaller agribusiness companies which offer services on a regional basis.

One has only to look at how the operational shortcomings of former liquor co-operative KWV Holdings were cruelly exposed after its dividend-paying stake in Distell was separated out and unbundled to shareholders.

But forward-thinking investors, including the increasingly influential PSG-controlled agribusiness investor Zeder Investments, are looking at providers of agribusiness services (the old co-operatives) as an inexpensive way to latch on to "food security" sentiment. Agribusinesses, much like mining supply or service companies during a commodity boom, might be where the real money is made as our endeavours to secure reliable food supply in SA and Africa intensify.

There are risks, though.

What has become clear in recent years is that the high-risk nature of farming ventures has left smaller former co-operatives feeling vulnerable. It is perhaps this vulnerability that could trigger corporate action that could trample longestablished pastures, particularly those in the Western Cape.

Earlier this month at the Vunani Securities small to mid-cap conference, two of SA's biggest former agricultural co-operatives - Klerksdorp-based Senwes and Swartland-based Kaap Agri - signalled their ambitions to plough up opportunities in a fast-changing farming landscape.

Both businesses, which undoubtedly will wend their way to the JSE in the medium term, are worth monitoring.

Both could reap long-term benefits by using their strong operational presence and muscular balance sheets to lead consolidation in the sector.

Senwes executive director Joe Maswanganyi says consolidation in the agricultural sector will be driven mainly by regulatory pressures (and cost of compliance), commodity price volatility and the growing size of farming operations.

He cites the drop in the number of small farmers, coupled with the growing influence and buying power of commercial farmers, as another factor likely to drive consolidation.

Players in the agricultural service industry that are restricted by geography and trade mainly in a single commodity could feel the pinch in the years ahead.

Maswanganyi says farmers are looking at silo storage alternatives, which will have a huge impact on the large grain services segment at Senwes.

Naturally Senwes will be looking at broadening its core grain storage and trading, but has listed mechanisation, milling & crushing, poultry, animal feed and resources (energy, water and lime) as areas of expansion.

Senwes has recently tied up a joint venture with European agri-giant Bunge to establish an oil crushing plant. Might Bunge later push for an equity stake in the tightly controlled Senwes?

That would look even more attractive if Senwes establishes a regional structure with a presence in Malawi, Mozambique and Zambia (where Zeder is rumoured to be close to clinching a deal).

Kaap Agri is also changing shape, having recently unbundled its valuable 29% holding in Pioneer Foods into a separate company (Kaap Agri Voedsel).

Kaap Agri CEO Sean Walsh says about three-quarters of the company's annual R2,6bn income is generated from its retail operations trading under the Agrimark brand. With 62 Agrimarks holding 250000m² of trading space, Kaap Agri might be regarded as an alternative retail play.

The retail offering also looks set for broadening. Walsh says Kaap Agri is expanding into building materials and DIY, liquor (Liquormark) and groceries (VillageMart, SaveMart and Expressmark).

While both Senwes and Kaap Agri have plenty of internal initiatives on their plates, both companies seem keen on making acquisitions. This is where things could get interesting.

Only last week two of the better-known Western Capebased agribusinesses, MKB and Overberg Agri, appeared to take a leaf out of Kaap Agri's book by selling (and in the latter's case also unbundling) a large portion of their respective holding in Pioneer Foods (see FM Fox, March 9).

In both cases the Pioneer shares represented a chunk of the respective company values and, perhaps more importantly, provided a safety blanket to offset periods of operational underperformance and as collateral for borrowings.

Shoring up a balance sheet with proceeds from Pioneer share sales is understandable, especially if there are perceptions that MKB and Overberg Agri might be prey for larger predators.

But by stripping out or markedly reducing the Pioneer quotient, MKB and Overberg are arguably even more susceptible to takeovers. Some market watchers have even wondered whether the reduction of the Pioneer stakes may be a conscious attempt to woo suitors.

The FM reported last month (FM Fox 24 February) that Senwes was obstructed in its efforts to gain an influential shareholding in MKB when shareholders declined to give the 75% majority support needed to change the company's ownership restriction regulations.

MKB management (and 61% of shareholders) seemed to agree that linking up with the powerful Senwes might be prudent, especially in view of synergies in geographically diverse grain storage operations. But certain shareholders reckoned the informal offer price by Senwes (rumoured to be around R25,50/share) discounted the R37/share intrinsic value of the company - a value (then) largely underpinned by the Pioneer shares.

MKB CEO Eugene Koekemoer says a link-up with Senwes would have made the company's operations (centred on grain storage) more profitable and sustainable. "After the Senwes deal fell through we decided to at least get some value back to our shareholders."

Koekemoer confirms that asset manager Allan Gray purchased around 5,78m Pioneer shares from MKB and that shareholders will receive a special dividend of 750c/share.

Whether Senwes will make another pass at the "lighter" MKB remains to be seen, though Overberg Agri could be a even more attractive target. This is a profitable R1,5bn/year business which specialises in the very things Senwes want to build on and branch out into: grain services, mechanisation, lime, abattoirs, financial services and industrial fasteners. But Zeder, which appears to have a tense relationship with Senwes, already owns a significant minority stake in Overberg Agri.

Kaap Agri might be better placed than Senwes to approach MKB or Overberg about making a deal. Overberg's retail network and diversified agriservices base might be a big attraction.

Presuming any approaches would not be stymied by the competition authorities, would common shareholder Zeder be able to play matchmaker between Kaap Agri and Overberg? Maybe, but Zeder may have its own plans to bolster its influence at both Kaap Agri and Overberg Agri first, perhaps through an offer to minority shareholders (as recently transpired at fruit exporting specialist Capespan).

Source: Financial Mail