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Blue Sky Meats seeks 30 cents/share lift from Binxi after review shows earnings upside

Tuesday 24th January 2017

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 Blue Sky Meats' directors say they want China-based Heilongjiang Binxi Cattle Industry Co to lift its takeover offer by 30 cents a share before they'll recommend it to investors after a strategic review that showed potential to drive profit growth.

The board told shareholders at a meeting last Friday that it recommended they wait for the outcome of negotiations with Binxi, which may conclude this month, well before the offer expires on Feb. 18.

NZ Binxi (Oamaru) Foods, a subsidiary of the Chinese company referred to as Binxi Cattle Group, is offering $2.20 per share for the 86.5 percent of Blue Sky that it doesn't already own. That's at the top end of independent adviser Campbell MacPherson's $1.93 and $2.21 valuation range.

The board told shareholders that chief executive Todd Grave led a strategic review by Blue Sky's management team that was "unconstrained" in its thinking and "identified a significant amount of unexploited potential". Grave, a former Fonterra marketing executive, only took up the job in October, just a month before the $25.3 million offer was announced.

They said the review used Campbell MacPherson's capitalisation-of-earnings approach that estimated a "full potential" value of the company of $3.20 a share and earnings before interest, tax, depreciation and amortisation reaching $8.4 million in 2020, compared with a business-as-usual estimate of just $600,000. The company posted a 2016 ebitda loss of $900,000. It also used the adviser's ebitda multiple of 6.75.

To reach the 2020 goal, the company would embark on a three-year work plan that targets a lift in yield, a jump in the proportion of chilled versus frozen meat exports and steps to return its beef line to profitability. That includes changes to shifts and practices in its processing and carcass trimming, lower freight costs, changes to effluent waste management, lower administration costs, an overhaul of energy usage and marketing of chilled product.

It described the plan as "playing catch-up with the wider meat industry in New Zealand." Notes for the briefing were released on the Unlisted platform.

The board's responsibility is "to maximise value to shareholders, $2.50 vs $2.20, it's a negotiation."

However, the directors said Benxi will win their backing if the offer price is increased to $2.50, which implies "future sustainable earnings" of $7.2 million.

Blue Sky chair Scott O’Donnell said last week that if the company can lift profits "you're worth more". Blue Sky "probably had dropped behind industry best. All we’re trying to do is bring it back to best practice," he said.

Binxi Cattle Group built its stake in Blue Sky last year, becoming the third-largest shareholder behind Lowe Corp and HW Richardson Group. It operates a vertically integrated beef business in China, owns New Zealand meat processor Lean Meats Oamaru and wants to acquire Blue Sky to grow its New Zealand Binxi business.

The offer is conditional on it receiving acceptances for at least 90 percent of Blue Sky shares, which will enable it to compulsorily acquire all of the remaining shares. It can waive that condition, but can't declare the offer unconditional unless it receives acceptance taking its holding to more than 50 percent. The offer is also conditional on the Chinese company obtaining consent from New Zealand's Overseas Investment Office.

Blue Sky shares last traded at $1.30 on the Unlisted platform, valuing the company at $15 million.

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