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Australia's competition regulator and national consumer law champion, Australian Competition and Consumer Commission (ACCC) is seeking views from market participants in relation to a draft undertaking submitted by Nutrien Ltd in connection with it seeking informal clearance from the ACCC with regards to the proposed acquisition of Ruralco Holdings Limited (ASX: RHL).
Nutrien is a company incorporated in Canada, which currently operates in Australia through its 100% owned subsidiary Landmark, significant agriculture business player. While Ruralco is an ASX listed company, which is primarily involved in selling farming supplies and merchandise in Australia.
Transaction Timeline
In the month of February 2019, Nutrien entered into a Scheme Implementation Deed with Ruralco to acquire all the shares in Ruralco for a total consideration of $469 million ($4.40 per share) via Agrium Australia Pty Ltd. The scheme has been already shown the greenlight by Ruralco Board. Ruralco had advised its shareholders to vote in favor of the scheme, considered as fair and reasonable (in the absence of superior proposal) by an independent expert.
In a Statement of Issues released by ACCC on 13th June 2019, ACCC had raised some preliminary competition concerns with regards to the acquisition. ACCC thereby sought public consultation and industry opinions on the transaction. ACCC invited interested parties to submit their observations and opinions to assist its evaluation of the transaction.
Concerns of ACCC
As per ACCC, both the parties involved in the transaction are engaged in retailing and wholesaling rural merchandise, and also offers services including wool broking, live export, livestock agency, and other similar services. It is thereby expected that the final transaction will result in merging two of only three huge national chain retailers of rural stock in Australia, which ACCC believes may lessen the competition in the market.
The ACCC is concerned that combining these businesses may increase concentration at the wholesale level and could reduce the number of supply options for independent retailers.
Both the parties involved in the acquisition are large national retailers and wholesalers; if these are combined it would supply around 650 rural merchandise stores nationally, which the ACCC believes is approximately 45% of all rural merchandise stores nationally. The regulator is of the view that by acquiring Ruralco, Landmark will gain greater bargaining power with its suppliers.
Nutrien and Ruralcoâs Standpoint
Via its proposed undertaking, Nutrien Ltd is trying to address the regulatorâs concerns. As per terms of the Draft Undertaking, Nutrien has proposed to divest the Landmark branded branches at Broome, Hughenden and Alice Springs.
Ruralco is working closely with ACCC in its review of the Scheme and is confident the issues can be addressed to the satisfaction of the ACCC and besides that it believes that the Scheme will end up in creating a strong rural services provider, with significant benefits for farmers, businesses and for communities.
Half Year Results of Ruralco: In the first half of FY19, Ruralco witnessed a revenue growth of 3% and 2% for Underlying EBITDA. Further, the company earned an NPAT of $16.6 million in the first half, which was slightly lower than the previous corresponding period (pcp). Likewise, the companyâs EPS also declined by 1% to $15.8 cents per share.
H1 FY19 Results (Source: Company Reports)
Despite facing mixed seasonal conditions, the company was able to produce strong results. For the half year period, the company declared an interim fully franked dividend of 10 cents per share which was paid on 18th June 2019.
The company has five strategic objective pillars which include
- Investment - Targeted geographic presence in all its chosen activities;
- Integration- Provide end to end solutions to its customers;
- Innovation- Be a leader in the future of agriculture
- People and culture- Keeping its people safe and invest in a high-performance culture
- Scaleable Back Office - Deliver digital transformation based on a reliable back office foundation
During, the half year period, the company acquired a leading Water projects business in Dalby in QLD in line with the companyâs strategy of investment. As part of this strategy, the company also acquired well regarded stock and station agency in Tamworth, NSW.
Since September 2018, the company witnessed 19% growth in Flexi Finance loans written and 11% growth in Seasonal Finance loan book, in line with the companyâs strategy of innovation. On its integration path, the company also increased its private label sales by 8% on the pcp, particularly sales of Covine animal health product line which has increased by over 50%.
During the half year period, the company also expanded the distribution of private label products to NZ via distribution partnership. The companyâs DataFarming software is now in use across the agronomy team which is providing satellite imagery to staff and customers.
Inspite of facing dry conditions in the first half of FY19, the companyâs business has grown the total loan book by 5% from September 2018, with 11% growth in the Seasonal Finance loan book and 19% growth in Flexi Finance loan book.
During the period, the company also witnessed Strong growth in earnings from Ausure JV, which has more than doubled on the previous corresponding period. However, these have been mostly offset by the impact of dry conditions and adverse grain market dynamics on earnings generated from the Agfarm JV.
To grow its earnings per share and total shareholder returns the company is executing its strategy with:
- Financial Discipline â The company is focusing on cost control and efficiency to drive positive operating leverage;
- Cash Flow Generation â It is Pursuing working capital efficiency and along with that it is realizing its profits into cash to reinvest in the business;
- Strong Portfolio Management â The company is acting decisively on the allocation of capital and managing returns from investments;
- Balance Sheet Strength â The company is also maintaining its funding flexibility and disciplined capital management to support growth aspirations.
In order to implement the scheme, an Informal clearance from the ACCC is required. Both the parties are waiting for ACCCâs final decision in this matter, which is expected to come around 15 August 2019.
The shares of Ruralco are trading at A$4.240, down 0.703% (as at 1:05 PM AEST, 31 July 2019). RHL has shot up by 41.39% during the past six months as on 30 July 2019.
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