AA Co hatches $299m capital raising plan to fund value-chain transformation

Jon Condon, 12/09/2013


The Australian Agricultural Co has launched an equity-raising campaign aimed at doubling its capital base as the company moves into its plan to develop its $90 million Darwin abattoir project as part of a value-chain focus on beef export into Asia.

The move, which plans to raise a further $299 million in equity, is designed to improve returns from the company’s land and cattle assets and move up the value chain to catch higher and more stable prices for export beef.

The complicated financial process would see British billionaire and Bahamas-based tax exile Joe Lewis become AA Co’s largest shareholder, with 19.9pc of the company’s stock. This would position him just below the 20pc foreign takeover threshold.

The capital raising move will also serve to reduce debt levels and fund further productivity investment to improve returns on the company’s herd of 560,000 cattle.

The prospect of capital-raising was touched on by chairman Don McGauchie during the company’s recent annual meeting in Brisbane, but the speed in which the process has unfolded has taken the market by surprise.   

Mr McGauchie said the cyclical nature of cattle production and high debt levels had restricted AA Co's ability to capitalise on opportunities presented by growing demand for higher-protein diets in the Asian market.

"It is quite clear that AA Co can no longer continue to be just a cattle producer," he said.

"The focus of the board is to improve the returns, and return on capital is paramount. It’s very important that the company is worth more than the sum of its parts."

AA Co shares have slumped to a 40pc discount to their $1.90 asset value and the company was recently forced to write off $43m from the value of its herd because of falling cattle prices.

The company wanted to improve the return on its assets by turning itself into a vertically integrated producer to capture higher international prices for beef.

The complicated plan is to raise $219m through a 7-for-10 share issue to existing shareholders at $1, and to sell $80m of convertible notes to Bahamas based investor Joe Lewis's AA Trust.

The share issue will see Mr Lewis (see Beef Central’s earlier story on his arrival as a significant AA Co investor here) emerge as the company's largest shareholder, lifting his interest from 13.5pc to 19.9pc through an agreement to sub-underwrite the issue of 34.6 million shares.

Converting the notes, which will pay him as little as 3pc a year for 5-10 years, would lift the AA Trust shareholding to a maximum 29.9pc.

Indian meat processing conglomerate IFFCO Felda, which owns 16.9pc of the company, will not participate in the raising, reducing its interest to 16.3pc. Shares are being offered at $1, a 14 per cent discount to the $1.17 at which AA Co shares last changed hands before being placed in a trading halt yesterday.

A company statement to the ASX said the net proceeds of the capital raising will be applied to:

  • fund the remaining capital expenditure (about $67m) and working capital requirements ($20m) associated with the Darwin abattoir project (total value $87m;
  • reduce net debt in order to support a future refinancing of its existing debt facilities; and
  • increase its financial flexibility to pursue its vertical integration strategy.

The funds also will be used to reduce net debt from $412m of predominantly secured bank loans to $248m, including the $80m convertible note. Gearing would fall from 40.9pc to 23.5pc.

“The majority of AA Co's assets are currently concentrated in capital intensive primary production with a high degree of exposure to variable climatic conditions and domestic cattle prices. Furthermore, AA Co's current balance sheet position limits its strategic flexibility,” the statement said.

“AA Co's strategy is to diversify away from capital intensive primary production by increasing its exposure to higher-margin, less-cyclical assets with a higher return on capital. The primary focus is on vertical integration of AA Co's beef business, including:

  • capturing additional margin from downstream processing (including by-products);
  • increasing direct access to international export markets, in particular in Asia;
  • improving productivity from managing supply chains across its pastoral, feedlot and processing assets; and
  • focussing on brand and market development to facilitate new and stronger relationships with high value food services customers in overseas markets.

Darwin abattoir key

The development of the Darwin abattoir is core to this vertical integration strategy and would provide beef processing capacity close to Asian export destinations, the statement said.

The abattoir will be the only substantial beef processing asset in northern Australia and, when completed, is designed to have annual processing capacity of 200,000 head. Operations are expected to commence during the second half of 2014.

Existing Australian meat processors remain doubtful over the proposed plant’s chances of financial success.   




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