Treasure Chest | Jul 23 2012
By Greg Peel
Goodman Fielder ((GFF)) has been having a tough time of it over the past year as margins have contracted in its primary bread production business. Costs have risen at a time the supermarket pricing wars have forced price cuts. The analysts at Credit Suisse suggest today's cash return on the invested capital in GFF's bread business is zero. It's not a GFF thing as much as a bread thing, given Credit Suisse believes competitor George Weston's return is probably the same.
Back in March, Singapore-listed Asian agribusiness giant Wilmar acquired 10.1% of GFF. This move prompted full takeover speculation, and analysts agree full acquisition is likely what Wilmar has in mind. On the news, GFF shares jumped close to 40%. However there remains a complication.
Takeovers aside, GFF has been looking to address its balance sheet issues with asset sales, and on the block has been the company's edible oils business, Integro Foods. To that end Australian company Cargill applied to the ACCC to make an offer but earlier this month Cargill withdrew its interest. GFF's share price has now drifted off 11% since the Wilmar-led spike.
Deutsche Bank was not surprised the offer was withdrawn. Cargill applied to the ACCC to buy Integro once before, back in 2009, but the regulator deemed such a deal to be anti-competitive. While Cargill may have come back for another shot, not much has changed in the industry in the meantime in Deutsche's view, so when the ACCC suspended this review and asked for more information from Cargill the decision was likely made by the company it would still be too hard a second time around. Hence the withdrawal.
Or is there something else to consider?
Despite the recent drift-off, there remains a level of takeover premium built into today's GFF price. Complicating the issue is that on Credit Suisse's assessment, Wilmar is an obvious buyer of Integro after Cargill. Gardiner Smith, which owns Riverland Oil Seeds in Australia, is another possible. Yet it is also assumed Wilmar's ultimate intention is to make a full bid for GFF. If this is the case, anyone else bidding for Integro may find Wilmar stepping into the fray with a kill-off conditional bid for the whole company. Any buyer of Integro is no doubt looking to be opportunistic given GFF's current difficulties, so a low priced bid is most likely.
Perhaps Cargill foresaw this problem, Credit Suisse suggests, which provides either an alternative or additional reason as to why Cargill pulled its bid for Integro. If no one else will buy Integro, it then follows that Wilmar could possibly ended acquiring Integro more cheaply via a full takeover of GFF. The implication here is that the market is possibly pricing in too much value at present for an Integro sale, and maybe also for the complete box and dice.
GFF has also recently announced the closure of a couple of bakeries to reduce its capex bill, but if it is unable to sell off Integro the balance sheet remains under pressure. There's no chance of margins improving given wheat prices are currently going through the roof. Credit Suisse does not believe GFF will need to raise capital but the company won't be able to pay an FY13 dividend and will still be sitting at the edge of the debt covenant precipice.
One presumes this provides Wilmar with more leverage on any takeover price. However there could be one saving grace, Credit Suisse suggests, and that's if the local bread makers stop killing each other and revert to price cooperation. (Credit Suisse makes no mention of whether the regulator would be happy). Were GFF able to raise its bread prices by a sufficient amount – 20% on wholesale branded bread is need in the analysts' view – and the $1.00 unbranded loaf price war is kyboshed, then GFF's share price would see some solid upside potential.
That aside, Credit Suisse on Friday lowered its target price on GFF to 50c from 70c, representing a 40c discounted cashflow valuation plus a takeover premium.
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