Australia

In this briefing:

1. M&A: A Round-Up of Deals in March 2019
2. Bull Or Bear? Latest Global Liquidity Readings
3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
4. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
5. Drill Results Confirm High-Grade Mineralisation (Flash Note)

1. M&A: A Round-Up of Deals in March 2019

For the month of March, ten new deals were discussed on Smartkarma with an overall deal size of US$22.3bn.

Clicking on the company name in the table below will take you to the entity page where you can see insight(s) written by Smartkarma contributors.

Blackstone and Hellman & Friedman made a proposal for Scout24 AG (G24 GR) in mid-January – which was rejected by the board – and subsequently returned with an improved offer which was then supported. The deal was first written on after the Tender Offer was officially launched in March.

The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.

Brief Summary of News in March of Arb Situations On Smartkarma’s Radar

(again, click on the company names to take to you to the insights and/or discussion posts)

2. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

4. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

5. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

In this briefing:

1. MYOB Setting Up As A Riskier Trade
2. Aussie Equities Reporting Season Wrap: March 2019
3. GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal
4. China – Eurozone Negative Feedback Loop.

1. MYOB Setting Up As A Riskier Trade

When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.

The full write-up is MYOB: KKR Launches a Proposal. Lightish?

About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline). 

Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)

Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.

David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.

The New News

While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”

The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.

2. Aussie Equities Reporting Season Wrap: March 2019

• Australia rallied strongly through a relatively solid reporting season, with the benchmark ASX 200 posting a strong 6% gain in the month. EPS was a little disappointing, given that only 50% of stocks that reported beat consensus estimates, with weaker-than-expected revenue the main culprit.  EPS growth for FY19 was downgraded by 1.1%pts to 3.5%, but analysts left EPS growth unchanged in 10 out of 19 industry sectors.  Materials, Pharmaceuticals, Consumer Services and Energy saw the largest downgrades relative to history after reporting half-year results.
• Government is having a Heavy Hand on Results. The Royal Commission in Financial Services is lifting compliance costs for the Banks, Wealth Managers and Mortgage Brokers.  Similarly, the Royal Commission into Aged Care is raising the same costs for stocks in this industry.  More stock-specific examples of Government intervention include AZJ, SKI, LYC and CAR (tighter credit supply from Banks).
• Cost pressures seem generally well-contained. US tariff-related cost pressures eased, but threats remain until a trade deal is negotiated with China.  Compliance costs are hitting Banks, Wealth Managers, Mortgage Brokers and Aged Care stocks.  However, the market seems to be more comfortable with the outlook. 
• Growth Stocks Not Raising Guidance Were Hit. Growth names such as COH, CSL, TWC and TWE that delivered strong results without an upgrade to full-year earnings were dealt heavy blows.  However, stocks such as WEB, which revealed new growth opportunities were rewarded handsomely.
• Good Management of Consumer-facing Stock Saves the Day. Filling slowing demand with higher-margin product offering delivered for JBH and SUL, while good performance from offshore stores came to the rescue for HVN.  DHG saw weaker listings but fought this by selling higher margin products to agents.  However, some stocks struggled.  FBU, BLD, BAP ABC all succumbed to housing weakness.
• Grasping the Infrastructure Opportunity. CIM, MND and SVW all delivered on the back of the upswing in public and mining infrastructure spending.  In contrast, LLC’s struggling Engineering Division is a good example of how a poorly managed business misses out on opportunities when industry conditions are buoyant.
• Model Portfolio Implications. We will soon update our model portfolio, but reporting season showed there is probably more upside in Resources than we thought at the end of last year.  The worst seems to have passed for the Banks, but we struggle to see significant upside in earnings.  We will retain a defensive bias in the portfolio, but most likely reduce it somewhat.

3. GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal

Graincorp Ltd A (GNC AU)‘s ability to generate shareholder value remains in doubt as LTAP enters its fourth month of due diligence. Yesterday, GrainCorp announced the first result (but overdue) of its portfolio review – the deal to sell its Australian bulk liquid terminals business to ANZ Terminals for A$350 million.

4. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

In this briefing:

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

In this briefing:

1. Bull Or Bear? Latest Global Liquidity Readings
2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
4. Drill Results Confirm High-Grade Mineralisation (Flash Note)
5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

1. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

4. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

In this briefing:

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
2. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

2. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

Whilst Smartgroup Corporation Limited (SIQ) has reported a  solid set of 2018 earnings, the real story is not the results, but the outlook.

We examine the potential for the company to simply deliver a multiple expansion. If SIQ succeeds with some further consolidation of acquisitions. The potential for this Event-driven upside is significant if this is combined with additional earnings trends. 

Furthermore, the stock rank system which the company is benchmarked against suggests potential to post an upgrade, which inevitably fuels share price performance. 

In this briefing:

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

Whilst Smartgroup Corporation Limited (SIQ) has reported a  solid set of 2018 earnings, the real story is not the results, but the outlook.

We examine the potential for the company to simply deliver a multiple expansion. If SIQ succeeds with some further consolidation of acquisitions. The potential for this Event-driven upside is significant if this is combined with additional earnings trends. 

Furthermore, the stock rank system which the company is benchmarked against suggests potential to post an upgrade, which inevitably fuels share price performance. 

In this briefing:

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential
2. Memory Chips and the Elasticity Myth

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

Whilst Smartgroup Corporation Limited (SIQ) has reported a  solid set of 2018 earnings, the real story is not the results, but the outlook.

We examine the potential for the company to simply deliver a multiple expansion. If SIQ succeeds with some further consolidation of acquisitions. The potential for this Event-driven upside is significant if this is combined with additional earnings trends. 

Furthermore, the stock rank system which the company is benchmarked against suggests potential to post an upgrade, which inevitably fuels share price performance. 

2. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

In this briefing:

1. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
2. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
3. Drill Results Confirm High-Grade Mineralisation (Flash Note)
4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
5. Xenith Is Running Out Of Excuses

1. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

2. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

3. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

5. Xenith Is Running Out Of Excuses

When IPH Ltd (IPH AU) gate-crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a scheme proposal comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM’s all-cash offer (1.22 QANTM), the key risk to IPH’s Offer was ACCC opposing its Offer. As announced today, ACCC will not oppose.

This decision was largely expected and previously discussed here. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by not opposing the merger of XIP and QANTM.

XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exists a number of concerns as detailed in its 19 March announcement. IPH responded to those concerns on the 20 March. These include:

1. Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.
   • IPH’s scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH’s position in the ASX200. 
   • The cash portion also provides added certainty on value into the Offer compared to QANTM’s all scrip offer.
2. The control premium as at 11 March is insufficient.
   • Probably the most contentious concern. QANTM’s all-scrip offer on the 27 November backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.
   • IPH’s $1.97/share indicative offer (a 60% premium to XIP’s undisturbed price, and a 31% premium to the independent expert’s mid-point fair value (page 55)) compared to QANTM’s indicative offer of $2.03 immediately before IPH’s announcement.
   • Circumstances have changed materially since, with IPH’s cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM.
     

     

     Source: CapIQ
3. The increased execution risk concerning ACCC. Now a non-issue.
4. It is questionable whether employees, controlling 40% of Xenith, would support the offer.
   • Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. 
5. CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM’s all scrip offer.
   • Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of $2.72/share.

With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.

In this briefing:

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential
2. Memory Chips and the Elasticity Myth
3. Nutrien’s Move On Ruralco Makes Agronomic Sense

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

Whilst Smartgroup Corporation Limited (SIQ) has reported a  solid set of 2018 earnings, the real story is not the results, but the outlook.

We examine the potential for the company to simply deliver a multiple expansion. If SIQ succeeds with some further consolidation of acquisitions. The potential for this Event-driven upside is significant if this is combined with additional earnings trends. 

Furthermore, the stock rank system which the company is benchmarked against suggests potential to post an upgrade, which inevitably fuels share price performance. 

2. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

3. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

In this briefing:

1. Memory Chips and the Elasticity Myth
2. Nutrien’s Move On Ruralco Makes Agronomic Sense

1. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

2. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.