It seems whenever a rural services company becomes overly debt-burdened directors think the answer is to sell the finance arm.
That was what Wrightson did in 1997/98, only to turn around and start building a new finance book, the one PGG Wrightson’s cornerstone shareholder Agria is now proposing to sell and for the same reason as the first sale.
Across the Tasman, Elders decided on exactly the same strategy last October, selling its 40% stake in Rural Bank to Bendigo and Adelaide Bank, which already owned the rest of Rural Bank.
The A$176 million (NZ$231.2 million) proceeds represented about 1.2 times book value. That suggests PGG Wrightson Finance might fetch about $120 million, based on its December 31 accounts.
However, that includes the convertible rate notes issued to Agria late last year. They are treated as equity for accounting purposes but would have to be either refunded or converted to PGG Wrightson shares if PGG Wrightson Finance was sold.
That means the equity in the finance company is actually about $65 million. So perhaps PGG Wrightson might realise $78 million, if it’s lucky – given its relatively small size any multiple on book value would likely be less than 1.2 times.
In valuing all of PGG Wrightson’s equity between $400 million and $490 million, independent advisor Grant Samuel estimated the company’s net debt at $220 million so selling the finance company might get that down to about the $150 million level.
Peter Rae at Aegis Equities Research, which is owned by Morningstar, estimated Elders sale of its Rural Bank stake allowed it to cut net debt to A$275.1 million at September 30 on a pro forma basis, cutting net debt to equity to 27% from 43%.
Deutsche Bank analysts say Elders is now less likely to breach its debt covenants as a result of the sale.
and Adelaide Bank managing director was clearly pleased with the deal: it provided his bank “with greater exposure to a well performing business with sound credit quality and strong returns.”
Similarly, PGG Wrightson Finance is a sound business, although it still had about $34 million in problem loans to highly indebted dairy farms at December 31 after writing off a further $5.7 million in the latest six months. After the write-off, net profit for the six months was $1.3 million, down from $3.3 million in the same six months a year earlier.
Elders is still able to offer its farmer customers financial services through a deal with Adelaide and Bendigo Bank. As Rural Bank managing director Paul Hutchinson said: “Nothing will change from an Elders’ customer perspective. They will still access Rural Bank products through their local Elders branch, just as they always have.”
The most likely buyer of PGG Wrightson Finance is Building Society is Building Society Holdings (BSH), which aspires to become the “heartland bank.” However, price might be a sticking point. The BSH merger of Marac, Canterbury Building Society and Southern Cross Building Society was done at book value.
Presumably, PGG Wrightson would strike a similar deal with BSH which is already planning to continue with the brand names of the various companies it is made up of.
BSH managing director Jeff Greenslade confirms his company “would certainly have an interest” if PPG Wrightson Finance were to be put up for sale but wouldn’t comment on what it might be worth.