Agribrands, a 1998 spin-off from Ralston Purina, sells Purina-branded animal feed to the largest farms in Asia, Europe and South America.
Chairman, Bill Stiritz, has announced plans to merge Agribrands with another Ralston spin-off called Ralcorp. BUT MANY BELIEVE THIS TRANSACTION WILL NEVER HAPPEN AND AGRIBRANDS WILL, INSTEAD, BE SOLD.
Using 10.5mm fully-diluted shares, AGX has a market cap of $425mm, which only slightly exceeds its $382mm book value. AGX has over $150 in net cash, bringing its TEV down to $275mm. With about 95mm in core-business EBITDA (normalized for currency fluctuations, excluding interest income) for both fy8/99 and fy8/00, AGX sports a ridiculously-low TEV/EBITDA multiple of 2.9X.
In a private sale what would AGX be worth? A good starting point is 5X core EBITDA plus the $14 per share in net cash, or $59.50, or a 45% premium to where it’s trading. Possible buyers (who could actually pay a lot more and still do a sweet, accretive deal) include multinational ag-companies like Archer Daniels, Conagra or Cargill and pure-play feed producers like Ridley and Nutreco.
In the announced merger with Ralcorp, AGX holders will receive three shares of the combined company. If AGX were to trade under $39, a cash election will be available for up to 2 million AGX shares at $39. The transaction will take at least six months and requires a 2/3 vote of both the AGX and RAH holders.
It’s very unlikely that AGX shareholders approve the deal, given what AGX is worth in an outright sale. There are just no synergies between AGX and RAH; the combination of unrelated businesses will surely turn off investors. On 9/15, a 5% shareholder, ThirdPoint Management, sent an angry letter to AGX, criticizing the proposed deal and urging the company to review other alternatives.
Read the letter at:
Ergo, AGX is likely to attract a bid. I would not be surprised if a bidder emerged in Q4 2000.
Like any good value investment, your downside appears somewhat protected. If no alternative deal emerges, AGX is unlikely to fall much below $39. At such price, the company would accept 20% of the AGX stock for repurchase. This would be highly accretive to earnings and you would be left with a very cheap company with savvy, stock-incented management.
Attractive valuation, big margin of safety, abundant near-term catalysts, . . . $2 down and $20+ up. Gotta like those odds.
The announced merger with Ralcorp (RAH) is unlikely to win shareholder support. Implicitly, this puts Agribrands "in play" with 45% upside to conservative private market value.
|Entry||09/21/2000 12:12 PM|
|I can't see Stiritz giving up this easily. I realize that the company has been "put into play", but what defensive moves do you expect him to make in an attempt to prevent an outright sale.
I assume that his board is handpicked, so that shareholders will get no real help from them.|
|Entry||09/21/2000 12:55 PM|
|Actually, I believe he's a seller . . . one who is in no rush and is smart enough not to make the first offer. In the proposed transaction he chose not include certain defenses available to him and he is well aware that he triggered the Board's "Revlon" duties . . . in other words they are obligated to opt for a higher offer and have forefeited the "just say no" defense.|
|Entry||09/21/2000 01:47 PM|
|Didn't CEO take 2mn options and no salary to run this. If so, why wouldn't he want to maximize the price to shareholders in the first place? Further didn't Purina Mills, the domestic animal feeds operations, file for bankruptcy recently. Any ideas what buyers were willing to pay in bankruptcy for this asset?|
|Entry||09/21/2000 03:05 PM|
|Yes, Stritz and others have lots of options. My guess is they are in no hurry, but willing to negotiate if a bidder comes forward. Regarding Purina Mills, I don't know what its worth, but its important to differentiate between mature markets (US) where there is overcapacity and emerging markets where AGX operates and the farming revolution is a long-term growth driver (recent history aside).|
|Entry||09/22/2000 10:34 AM|
|How do you expect this situation to play out. Are you expecting a hostile big from one of the big multinationals that you mentioned? Have any of them done a hostile deal before?
Are you expecting it to go to shareholder vote and rejected and then put up for sale?|
|Subject||hostile not likely|
|Entry||09/22/2000 10:47 AM|
|No I doubt anyone will go hostile. But I wouldn't be surprised if someone made public a friendly offer after being rebuffed by management. Nor would I be surprised if the company announced they have received "numerous expressions of interest." I believe they will be required to discuss any such matters in the forthcoming proxy statement for the Ralcorp deal.|
|Entry||09/22/2000 06:41 PM|
|You said, "Downside protections Like any good value investment, your downside appears somewhat protected. If no alternative deal emerges, AGX is unlikely to fall much below $39."
Knowing less than zilch other than a quickie review of the 10K, I find the following for 5 year net income:
YTD Down from 44.0
What assurance do we have that 95m in EBITDA is sustainable given this history? I also see that capital equipment purchases have met or exceed depreciation expense over the past 3 years. The limited public history of this company also suggest that $39 has been broken numerous times in the past.
I can name 20 to 30 companies with mutiples under 5x but they aren't going anywhere (or at least haven't gone anywhere lately). Why would this one be any different?|
|Subject||Responses to paul118|
|Entry||09/25/2000 08:52 AM|
|Your comments are not so shallow.
Net income prior to the 1999 spin off from RAL was grossly depressed due to lack of managment attention to this business. For example, since the spinoff they have brought the tax rate from 60% to under 40%. As to the stability of core-business cash flows, look at the "income over ingredient costs" line over the last five years. This key AGX metric has held very steady despite the asian crisis and massive restructurings in Europe.
Re capex, it was unusually high in FY1997-8. I believe Stiritz was "fattening up" his retirement gift from Ralston over this period. Going forward I'm using 25m for depreciation and 25m and falling for capex.
The protection at $39, is I believe a function of the announced intention to purchase 2m shares for cash at $39 as part of the Ralcorp deal. Below $39 (if the Ralcorp deal is the only alternative), AGX would attract arbs who hope to get a large cash proration in the tender election.|
|Subject||thanks for this idea.|
|Entry||09/26/2000 12:28 AM|
|I appreciate these types of opportunities. Keep them coming.|
|Entry||09/26/2000 02:07 PM|
|I like your ideas as well. I have held MFW for a long time.|
|Subject||Notes on the AGX proxy|
|Entry||10/11/2000 12:47 PM|
|A preliminary proxy has been filed for the proposed AGX-RAH merger, suggesting a meeting date of January 2001.
Much of the proxy is devoted to the four fairness opinons sought in connection with the approval of the deal by the two Stiritz-controlled boards.
My impression is that every attempt was made to low-ball the valuation of AGX. For example, generally the advisors gave equal weight to three valuation methods: Trailing market price; EV-based metrics; and EPS based metrics.
I fail to see how trailing market price should be given the same relevance as EV/EBITDA and EV/EBIT -- two indicators on which the AGX valuations were off the charts. Remember AGX trades at 2.9x EBITDA and 3.6x EBIT. The median and average for comparable deals and comparable trading multiples were more than twice that level (suggesting a fair price even higher than the $60 I suggested for AGX). C'mon guys, you know what the important metrics are.
Also, giving weight to EPS-based metrics is kind of laughable in that AGX brings $180mm of cash to the table while RAH brings $200mm in debt! They kind of failed to account for that. (Admittedly, RAH has a valuable stake in Vail Resorts -- but it doesn't nearly offset)
. . . more later|
|Subject||"Un-fairness" opinion of Houli|
|Entry||10/11/2000 12:57 PM|
|The most egregious part is the opinion of the AGX independent commitee's own advisors - Houlihan Lokey.
In their opinion, these noble defenders of the independence of the process saw fit to whack all AGX merger-comarables with a 16.7% discount -- on the theory that no "control premium" was being acquired in the AGX-RAL merger.
None of the "opposition"'s advisors imposed a discount of this kind.
Thanks, guys. Super job.|
|Subject||2/3rds Vote needed|
|Entry||10/11/2000 01:02 PM|
|One comforting thing from the proxy is that AGX managment own less than 1% of the voting stock. All their ownership is in options. Three hedge funds own about 25% in aggregate and believe you me,they aint going quietly.|
|Subject||Nutreco / AGX comparison|
|Entry||10/23/2000 12:11 PM|
|Nutreco, which trades in Amsterdam, is perhaps the closest public comp to Agribrands. Nutreco also breeds livestock and produces certain acquatic feeds in addition to its feed operations that overlap with AGX.
Another big differentiating factor is that Nutreco grows rapidly by acquisition while AGX has basically decided that futher investment in this industry doesn't make sense. Furthermore, Nuteco has good relationships with top-tier investment banks (Goldman did its IPO in '97). Agribrands does not speak to the street.
So how do the valuations compare? Huge edge to Nutreco
P/E Nutreco 23; Agribrands 10
P/Book Nutreco 3.8; Agribrands 1.1
Is this justifed? I don't think so.
Op margin Nutreco 3.6%; Agribrands 5.6%
Pre-tax margin Nutreco 3.4; Agribrands 5.8%
Net cash (debt) Nutreco (90m); Agribrands 150m
So maybe acquisition-happy Nutreco will turn its attention to Agribrands and take advantage of this disparity. Clearly, it could pay a 100% premium and still get generous accretion from the deal.
I say . . . go for it.|
|Subject||$54.50 from Cargill|
|Entry||12/04/2000 08:48 AM|
|. . . OK that's a nice start. Agribrands has retained the right to shop this bid for 30 days. I don't believe they have been very forthcoming with other potential bidders prior to this. Remember the thesis is that a lot of public ag-companies cannot afford to let this accretive little nugget go and could pay up to $80 in a stock deal.
If you're not to busy researching the award-winning KDE idea, stay tuned and let's see what happens.|
|Subject||Mad cows in Europe?|
|Entry||12/08/2000 05:14 PM|
|Naturally, no sooner than the deal is announced, there is much press this week about about mad cows and significant reforms in Europe. I lightened a bit into friday strength. Although the problem is now limited to cattle and to Western Europe, it may spread. Negative factors include significant reduction in beef demand in Europe, steer reductions in France (not an AGX market), bans on use of animal products in feed (a COGS issue). Cargill presumably was up on all this at the time of signing (before it hit the papers) and so far theres nothing remotely rising to the level of a "MAC". But we should note and monitor the risk here.|