By Peter V O'Brien
Friday 7th February 2003
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Moody's ratings, its reasons and analysis of the "unsolicited cash offer" for Goodman Fielder (GMF) accounted for more than 10 pages of the NZSE daily memo on January 30.
Burns Philp offered $S1.85 a share for all of GMF's shares. Moody's said the proposed acquisition would cost $A2.4 billion, including fees and existing GMF debt. The agency downgraded three of Burns Philp's current securities and assigned relatively low ratings to four proposed others. It said the ratings' outlook was negative.
The assessment was objective: "The addition of GMF would nearly triple Burns Philp's revenues to $A3.9 billion [$US2.2 billion] and add a strong regional portfolio of branded foods with relatively stable cash flow to Burns Philp's existing yeast and spice business.
"Burns Philp, however, intends to substantially debt-fund the acquisition, which would increase leverage to very high levels. In addition, integration of GMF could be challenging, given GMF's large size relative to Burns Philp's limited knowledge of GMF's business. The negative ratings outlook reflects uncertainties about GMF's underlying financial position combined with integration risks."
After a discussion of GMF's debt position, the report went back to Burns Philp: "Burns Philp's ratings, excluding the prospective GMF acquisition, are restrained by aggressive growth objectives and a significant gross debt position established in 2002 to fund future, unidentified acquisitions.
"Prospective for the GMF acquisition, the ratings are limited by very high resulting leverage, the potential that deleveraging could slow should Burns Philp fail to realise meaningful cost savings at GMF, the planned application of some portion of free cashflow to pay ordinary dividends and the likelihood of additional acquisition activity in the near future.
"The ratings also incorporate the challenges of adding a large business that is dissimilar to Burns Philp's existing operations."
The report outlined the companies' activities on a factual basis. It said Burns Philp lacked broad public ownership. "... the company's majority shareholder, Graeme Hart [who owns 57.6% of diluted shares], has a substantial influence over the company's management and board. Burns Philp has indicated that if the GMF acquisition is completed, it may acquire New Zealand Dairy from Mr Hart, subject to approval by independent board members and approval by a majority of independent shareholders.
"Moody's' ratings assume this transaction, if completed, would not materially impact Burns Philp's effective leverage."
Mr Hart's fate was assumed to be horrible after he bought into Burns Philp and had to weather a substantial share price decline. The company recovered, the share price soared and Mr Hart was again deemed an investment genius.
He seems to have a penchant for debt-financing acquisitions.
Back in the days of the then New Zealand-listed Rank Corporation, under Mr Hart's control, his company bought the privatised Government Printing Office for $23 million, with substantial debt-financing. It was passed on.
High, or potentially high, leverage has the capacity to cause problems. Lenders want interest payments and eventually reduction of the capital amount, particularly if cashflows and capital value fall below the interest imposition and realisation of assets assigned as security for the debt.
Only Mr Hart and his financiers know the financial position of his private companies.
Moody's assessments were related to the financial structures of the listed companies. It was worth noting Standard & Poor's also downgraded Burns Philp's ratings.
The bid for Goodman Fielder was made at $A1.85 but the shares closed last Friday at $A1.75, suggesting the market had a negative view about the bid, unless cynical traders deliberately depressed the price for eventual capital gain.
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