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Hart's Goodman bid looks doomed to failure

By Shoeshine

Friday 24th January 2003

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New Zealand's richest citizen must be taking some satisfaction in the fact the usually scathing Australian media has been so uncritical of his debt-happy tilt at their largest food group.

Partly no doubt this is because some of them pilloried him for buying into Burns Philp just before its financial meltdown and have since had to eat their words as he turned the yeast and spices company steadily around.

It also reflects the scepticism that years of poor performance at Goodman Fielder have generated among investors and the business community generally.

Despite a modest rising trend in the share price before Graeme Hart's bid many feel the most rational course for Goodman is a break-up ­ an option Hart has already ruled out.

But if anybody can make the company as it exists return its cost of capital on a consistent basis, commentators seem to agree, it's Hart.

The trouble is that there seems no good reason for Goodman's institutional shareholders to accept his offer.

Goodman directors' rejection of the bid as "opportunistic" is based on some huffing and puffing.

They insist, for example, that the group's share price has been held back by a drought-induced spike in the price of wheat, a basic input for the milling and baking company.

That's no doubt true but the fact remains the share price has been below $A2 for all but two of the past 12 years: 1997 and 1998.

And the price has not risen above the Burns offer since it was announced in December despite a fresh, bullish profit forecast for the June 2003 year and vigorous chest-beating about the success of the new strategy.

The directors also say the offer price of 7.5 times this year's forecast earnings is below the values at which "comparable international branded food companies" with "strong brands and a commitment to brand support" trade around the world.

But they admit those co mpanies ­ none of which is identified in the target statement ­ deliver high economic profit results. The same can't be said of Goodman.

Last year was the first for more than a decade in which it returned more than its cost of capital ­ that is, created wealth rather than destroyed it.

Somewhat conveniently it was also the first year in which the company reported its results on an economic profit basis.

In these terms it made $A21.8 million more than the cost of the capital provided to it by its shareholders and creditors. But in 2001 it made $A27.3 million less, in 2000 $A25.9 million less, in 1999 $A59.8 million less and so on.

Its target company statement quotes consultancy Stern Stewart's 2002 Wealth Creators Report showing it ranked 18th out of Australia's 100 biggest companies.

But in 2001 it ranked 84th. Its 2002 "future growth value" ­ the amount of growth in economic value added investors had built into the share price at the time the report was compiled ­ was minus $A1.24 billion, down from minus $A745 million the year before.

The company says all this has changed. Chief executive Tom Park joined up in October 2001 and chairman Keith Barton took over from stand-in Sir Dryden Spring in March last year.

The new guard has adopted and pursued a new strategy. Its basic problem in years gone by was that it was trying to brand commodity products but the branding was costing it so much that it effectively stood still.

In recent years it's been selling off the commodity goods businesses, chopping costs and investing the savings in building up its value-added brands.

Last year's pre-tax profit represented a distinctly healthy 15% return on funds employed while operating cashflow was up 43% to $A327 million.

It is presumably these burgeoning cashflows Hart is relying on to service the mountain of debt he will have to take on if his bid succeeds.

To pull this off, shareholders in the two companies, some of whom will hold both stocks, will have to take two different views of Goodman's prospects.

Burns Philp holders will have to believe Goodman really has finally turned the corner in terms of value creation, as its directors insist it has.

If it hasn't and the takeover goes ahead, the merged company will have serious problems servicing its mountain of debt.

But if Goodman shareholders buy the story, they should also accept the board's view that $A1.85 a share is too cheap.

While the bid puts something of a cap on the share price it isn't unknown for stocks to trade at prices significantly above an offer price, as Contact Energy did during Edison's last attempted mop-up.

Goodman's share register is wide open so in the end institutional investors will decide the bid's outcome.

The weighting of a merged entity on Australian and New Zealand indices would mean many of those investors would have to hold it in their portfolios.

And to exchange a modestly geared Goodman at last showing signs of life for a debt-laden Goodman-Burns with no great synergies and no articulated strategy is likely to be a risk even Hart's well-deserved reputation can't convince them to take.

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