Analysts say Saskatchewan Wheat Pool undervalued its competitor Agricore United in its hostile bid to take over the company, and that makes the offer unattractive to shareholders.
“At this price I’m definitely not a seller,” said Robert Beauregard, a portfolio manager at Natcan Investment Management in Montreal.
The company owns more than 3.6 million AU shares on behalf of various clients.
“I think it makes a lot of sense for Western Canada to consolidate,” he told Sask Pool chief executive officer Mayo Schmidt during a Nov. 7 conference call.
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“But I’m just somewhat surprised by the valuation which you would attach to such a bid, which you know in this particular case makes it very difficult for existing Agricore shareholders to support your initiative.”
The pool offered 1.35 common shares for each outstanding limited voting common share of Agricore. That would result in 80 million shares issued to AU shareholders to obtain 47 percent of the new company.
But Beauregard said AU generated earnings before interest, taxes, depreciation and amortization of $129 million in the 12 months ending July 31, while the pool generated $67 million. He questioned why AU shareholders would settle for less than half of a new company when it brings so much more to the table.
Schmidt said they would benefit from the $60 million in annual savings resulting from a merger.
He also said the new company would have a major presence in all three prairie provinces and generate sales worth $4.3 billion.
Cherilyn Radbourne, an analyst at Scotia Capital, said the pool will have to enhance its offer if it wants AU shareholders to take it seriously.
The Nov. 7 offer values AU at $9.33 per share, a 13 percent premium.
“Assuming this is a merger of equals, whereby the synergies would be shared equally, our calculations suggest fair value for AU is in the range of $13 a share,” she wrote in an industry comment issued Nov. 9.
The takeover attempt wasn’t a complete surprise to observers. Beauregard said the industry has known for some time that it has to consolidate to become stronger in the global marketplace.
Agricore can reject the offer, find another company to buy it or even make a counter offer to take over Sask Pool.
“Status quo is often not the best option,” Beauregard said in an interview. “Normally (a hostile takeover attempt) is a signal that there are others that think you are not doing the best for your shareholders.”
David Newman, an analyst who follows the pool for National Bank Financial, said the interests of farmers also have to be considered.
Farmer members elect 12 of the 15 directors to AU’s board, and a fundamental change such as the sale of the company requires 75 percent of the board to agree or the affirmative vote of those holding two-thirds of the outstanding limited voting common shares at a special shareholders meeting. It also requires a special act by Parliament to amend the Governing Act.
Newman said the government might be concerned that farmers will have fewer delivery options given the size and geography of the new company.
Keystone Agricultural Producers president David Rolfe said farmers are concerned about the implications if one grain buyer and inputs supplier is taken out of the marketplace.
“I understand the need to gain efficiencies in the system,” he said.
“It still begs the question, if the merger goes through will those efficiencies be passed on to farmers?”
At Davidson, Sask., concrete high-throughput terminals owned by Sask Pool and AU stand sentinel at each end of town.
Lorne Willner, a farmer and reeve of the Rural Municipality of Arm River, in which the pool terminal is located, said it’s too early to know how a takeover would affect the facilities.
He said farmers know the takeover attempt is part of the business, and the “eat or be eaten” philosophy applies.
“I can’t imagine what they would do with two (elevators) in the same town,” he said. “I’m sure they can’t start pushing them down.”
Willner said the timing of the announcement is interesting because of the threat to the Canadian Wheat Board export monopoly.
“Here you’ve got a company that’s trying to eliminate competition to become a monopoly,” he observed.
The Grain Services Union, which represents 900 Sask Pool workers in Saskatchewan, 75 in Alberta and 25 in Manitoba, said it is concerned about job elimination and layoffs particularly where there is duplication, as in Davidson.
General secretary Hugh Wagner said he has even received calls from Agricore workers wondering how they might be affected. He said the union will press ahead to resolve outstanding pension issues with the pool.
“This whole situation indicates the pool has the resources to backstop the pension plan,” Wagner said.
