Mayo Schmidt faced a formidable challenge when he became Saskatchewan Wheat Pool’s chief executive officer in January 2000.
“There was a significant debt load that required immediate attention,” he said, reflecting back on his first days with the prairie grain icon.
The debt burden became nearly insurmountable after back-to-back droughts in 2001 and 2002 slashed revenues, forcing the company into temporary default with its lenders.
Schmidt spent the waning months of 2002 and January 2003 on the phone with the Pool’s bankers and in meetings with bondholders attempting to stave off bankruptcy. The two groups did not see eye to eye on how to proceed.
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By February he had hashed out a last-minute deal to save a prairie institution that would turn 80 the following year.
“We have substantially completed all of the heavy lifting that was required to get the Pool back in competitive shape,” Schmidt said in a Feb. 4, 2003 speech to bondholders.
“After these long months of intense and often stressful reorganizations, the Pool is now positioned in every way to move confidently and competitively into the future.”
The grain handler went on to post a net loss of $34 million that year, a marked improvement over the $92 million loss of 2002.
Flash forward to Sept. 10, 2008, and Schmidt is telling investment analysts and reporters about Viterra’s net earnings of $242 million for the first nine months of 2008.
The company that was once the Pool realized better than expected synergies from the 2007 acquisition of Agricore United and plans to continue along that aggressive yet disciplined path of growth by acquisition.
Some analysts say it is a rare and stunning turnaround made possible by shrewd business management during a time of financial crisis. Others chalk it up to good timing, good luck and ruthless leadership.
Reflecting on his eight years at the helm of Canada’s largest grain company, Schmidt puts it in his own words: “It is truly a miraculous reversal of fortunes, you might say.”
He gives full credit to his management team.
“What this group did is they came in and they showed they could restructure it, rebuild it, strengthen it, grow it and take it from a financially challenged company that was avoiding bankruptcy to a company that’s one of the strongest in its sector in the world today.”
When the Pool’s board of directors hired the former chief of ConAgra Grain Canada in January 2000, Schmidt inherited a company drowning in $1 billion of debt thanks to the three-year, $799 million expansion and construction strategy of predecessor Don Loewen and his board of directors.
While the Pool had good fundamental assets that could “do exceptional things” if given the right balance sheet, it was also saddled with non-core assets, many acquired during Loewen’s tenure.
Schmidt started selling them shortly after taking the reins.
The sale of the Pool’s interests, including hog barns, flour mills, oilseed crushers, meat processors, livestock feed and services, a doughnut chain and The Western Producer, raised money to pay off $200 million of debt.
Schmidt was making headway with his attempt to restructure the pool’s balance sheet, but successive droughts interrupted his plans. The second drought in 2002 was particularly devastating, wiping out half of the prairie crop.
Vastly reduced sales of inputs such as fertilizer and herbicides and reduced grain handlings threw the company into such financial turmoil that by January 2003 the Pool was in a fight for its life.
“From what I understand it was about as bad as it could have been,” said Murray Fulton, agricultural economist with the University of Saskatchewan.
“They were probably within minutes of going bankrupt.”
Initial attempts at restructuring failed because of a disagreement between the banks and the bondholders. On Friday, Jan. 31, 2003, the Pool was officially in default on its loans.
Over the weekend, Schmidt was able to put together a deal that appeased the banks and bondholders. By Monday the bank lines were fully funded.
On Tuesday, Feb. 4, 2003, bondholders voted 85 percent in favour of the revised restructuring plan, in which $405 million of long-term debt was converted to senior subordinated notes and equity.
“Stick handling through this was probably the most important thing (Schmidt) has done so far and it looks like he has succeeded,” financial analyst David Schroeder said at the time.
Former Pool delegate Paul Beingessner puts it a different way:
“Wow, did (Schmidt) ever manage to squeeze the shareholders and the lenders and use the fact that the company was going down the tubes to restructure it,” he said.
“He left everybody holding the bag except Sask Pool. It’s astonishing. The guy is a genius.”
Fulton said Schmidt deserves full credit for finding a deal that worked for everybody. However, he doesn’t believe creditors had any option but to agree to it.
“People said we’re not getting very much, but we’ll get more than if we let it go. So they kept their money in.”
Shortly after the financial restructuring the Pool cleaned up its balance sheet through a process known as fresh-start accounting, which re-valued all of the company’s assets at 2003 market values.
With all the juggling of debt and equity, the Pool’s financial statements had become incomprehensible.
“It wasn’t clear to people as to what in fact they were investing in,” Schmidt said.
“(Fresh-start accounting) brought clarity and good disclosure to the financial statements.”
In 2004, the Pool posted a modest $5 million profit, the first positive net income since 1998. In the annual report Schmidt referred to it as “a year of recovery” for the organization.
Two years later the company stunned the grain industry with a hostile takeover bid for the assets of its main competitor, Agricore United.
“I don’t think anybody was thinking of the Pool as a major player at that point,” Fulton said. “It was going to be a reasonably performing grain company, but nothing special.”
Brian Hayward, former chief executive officer of Agricore United, was one of those who were taken aback by the bid.
“I was quite surprised,” he said.
The Pool got into a bidding war with James Richardson International for AU’s assets and eventually prevailed in its $1.8 billion cash bid by raising $925 million through equity markets and $750 million in bridge financing.
Schmidt might have been the only person in the western Canadian grain industry who wasn’t shocked.
“Quite frankly, I had in my mind this outcome for many, many years,” he said.
AU was the bigger company. It had $1.46 billion in assets in 2006 compared to the Pool’s $774 million, and earnings before interest, taxes, depreciation and amortization (EBITDA) of $141 million compared to the Pool’s $68 million.
The prevailing thought at the time was AU would be the one behind any takeover attempt.
However, when the Pool first went public it was protected by a clause preventing any person or entity from owning more than 10 percent of its shares. By the time that clause was removed, AU was in no financial condition to consider further expansion or a takeover.
It was working off its own heavy debt load that the Agricore co-op brought along in its 2002 merger with United Grain Growers. It was also still dealing with integration issues.
“It just did not register on our radar screen. It wasn’t a practical idea,” Hayward said.
Schmidt said while Agricore United had the stronger EBITDA, the Pool had the better trading multiple, a value used in conjunction with EBITDA to determine the market value of a business. That gave the Pool the leverage it needed for the takeover.
Agricore United was an appealing asset for the Pool because of the similarities between the two businesses. At first blush the Pool thought there would be $60 million in savings by eliminating duplication.
The latest estimate is $104 million in synergies for Viterra, the new name for the combined Pool-Agricore United venture. That was a big reason Viterra was able to post a $242 million profit for the first nine months of 2008.
“I’m impressed in terms of what they’ve been able to do,” said Hayward, who is now president of Aldare Resources, a management consulting firm. “They have a very strong balance sheet – excellent. The company is really well positioned.”
However, Hayward noted the deal to form Viterra closed a year and a half ago and it may be premature to draw conclusions about how things are going to pan out for the new company.
“Sometimes it takes a matter of three to five years for something to play out and be understood fully.”
Hugh Wagner, general secretary of the Grain Services Union, said the difference between today’s Viterra and the company Schmidt took control of in 2000 is stark.
“Certainly it’s akin to a 180 degree turn,” he said. “One can certainly appreciate the determination and the effort that Mr. Schmidt and his team has put into transforming what was a company experiencing near death to become a powerhouse.”
Fulton’s assessment of Schmidt’s tenure at the helm of the Pool and Viterra is less flattering. He noted that Schmidt inherited useful assets from Loewen’s Project Horizon campaign, a network of concrete elevators that started to “bear some fruit” once Schmidt took over.
He also benefited from the merger of Agricore and UGG because some customers loyal to the co-operative ideal would have done business with Agricore had it remained a co-op rather than merging with UGG. Instead, those customers stayed with the Pool.
As well, the Pool was able to gain market share because of a change in Canadian Wheat Board car allocation policy.
Fulton said Schmidt deserves credit for the Pool’s turnaround in fortunes, but he also benefited from “dumb luck.”
At the time of the takeover, analysts speculated that Schmidt paid too much for AU. However, shortly after the deal closed, grain prices went through the roof, driving up handling margins and crop input sales.
“Just at that point everything flips into a brand new world and all of the sudden the price he paid was almost peanuts,” Fulton said.
Schmidt said shareholders believed in the deal right from the start because they had a firm understanding of the Pool’s balance sheet, they knew it was doable, were confident in the Pool’s leadership and were aware of the magnitude of the synergies at stake.
“We had, as an organization, a stronger view of that outcome than probably the target company, Agricore United,” he said.
Schmidt said Viterra was not an end goal but rather a launch pad for growth.
“This is for us the new beginning that we were looking for.”
Steering the company through the growth phase is “night and day” better than the early years of selling off assets and reducing the workforce. But that was a necessary evil.
“We had to earn the right to achieve this outcome through our actions and through being accountable,” said the author of one of the biggest comebacks in the history of Canada’s grain industry.
