SunRice spurns its Alan Bond opportunity

Kerry Packer’s famous remark, "You only get one Alan Bond in your lifetime, and I've had mine” stands as the ultimate common sense statement about selling assets. When someone offers you a reckless price, grab it with both hands.

But whereas Kerry Packer accepted Bond’s offer and sold Channel 9 (only to buy it back again a few years later at a lower price), the rice industry rejected Ebro’s offer to buy SunRice. They spurned their Alan Bond, and there will never be another like it.

Spain’s Ebro had offered to buy SunRice for $610 million. SunRice is a fundamentally sound company with good brands and a sound history of marketing Australian rice. But it has just been through a terrible drought that cut rice supplies to negligible levels, it has about $300 million in debt, and nobody but an Alan Bond type would pay $610 million for it.

Ebro is probably relieved the offer was rejected. Not only had the offer been pitched high in an effort to overcome opposition, but with the increase in the exchange rate it became a much higher price in euros than when the offer was first announced.

A few rice growers are probably also relieved, but not the majority. Two-thirds of A-class shareholders and three-quarters of B-class shareholders voted in favour of the takeover.

Had the offer been accepted, the shareholders would have received a tidy cash injection to help recover from the hardships of the drought. Rice growers (most of whom are shareholders) could have continued to sell their rice at world prices, but would have missed out on any future dividends paid by SunRice.

That the offer was financially attractive is not in much doubt. Its overall value was more than twice shareholders’ funds. One shareholder decided it was insufficient based on very optimistic projections of future earnings, but few agreed. Even Bill Heffernan said it was a good offer, before recommending growers vote against it.

Those who view the rice industry in commercial terms know they missed the best opportunity they are ever likely to see to convert their equity in SunRice into serious money. But the reasons the offer was rejected were not commercial, at least in the normal sense.

Rather, they were based on a view that the long-term interests of farmers are best served when they retain control over the marketing of their produce. The same attitude is what motivated opposition to deregulation of other commodities, including wheat and dairy products.

SunRice has an exclusive licence to export the NSW crop, granted by the Rice Marketing Board. NSW rice growers may only sell their rice to SunRice or one of the processors licensed to sell it domestically. The Rice Marketing Board has three members elected by growers plus four nominated by the Minister, while the board of SunRice is dominated by rice grower members. This, apparently, is regarded as grower control over their industry.

Ebro obviously recognised the value of a monopoly and negotiated for SunRice’s licence to be extended until 2016 if the takeover was approved. The Rice Marketing Board was also set to benefit with the repayment of a $30 million debt owed by SunRice.

Heffernan argued for rejection on the grounds that a foreign company should not have control over the entire state’s rice crop. I anticipated this might emerge as a key objection back in October (Spain's sticky rice offer, October 29). Why foreign ownership makes a monopoly worse is never explained, but it’s not an uncommon sentiment.

From a commercial perspective a better option for rice growers would have been to accept the offer but simultaneously free up the rice market so they could sell their rice to whoever they wished. They would have ended up with both the money and the box. But that wasn’t an option, and it’s not certain most would have welcomed such freedom anyway, so they got neither.

With the dust now settling, it must be dawning on the industry that there’s not much to be pleased about. SunRice needs to raise capital to reduce its debt, meaning existing shareholders will be asked to contribute money or suffer dilution of their equity. Instead of money coming in, it will be money going out.

And whether equity can be raised while A-class shareholders retain all the votes is doubtful, so there may need to be restructuring as well.

SunRice’s profits, and hence dividends, will be adversely affected not only by debt servicing but because the company now owns most of the rice storage and logistics infrastructure and therefore has higher operating costs.

And finally, the Rice Marketing Board wants its $30 million back, so it’s unlikely to do anything to reduce the ability of SunRice to repay it. That rules out issuing any more export licences, leaving growers with the same limited options for selling their crop.

And to think rice growers could have been laughing all the way to the bank. Kerry Packer would turn in his grave.

David Leyonhjelm works in the agribusiness and veterinary markets as principal of Baron Strategic Services and Baron Senior Placements.