RURAL services group Elders has taken the highly unusual step of releasing confidential correspondence with its biggest shareholder, Ruralco, in a bid to defend its decision not to enter merger discussions.
Elders on Thursday confirmed a report in The Australian Financial Review that Ruralco, Australia's second biggest farming services player, had approached Elders about a merger deal to create a $500 million rural services group to rival market leader Landmark.
Ruralco responded to an Elders announcement to the Australian Securities Exchange on Thursday morning, saying it did not believe Elders' capital position was sustainable. That prompted Elders to release the entire correspondence.
Elders believed Ruralco included more information in its announcement to the ASX than Ruralco had provided in its September 10 letter – specifically details about premiums paid to hybrid and equity holders.
The letters show Ruralco wants to recapitalise Elders and reach a "compromise" with hybrid holders, who are entitled to be paid out $100 per note in a takeover, not the $44.80 the hybrids closed at yesterday.
Ruralco's statement included details about paying hybrid holders a discount to face value but a modest premium to recent market prices.
It is believed Ruralco would look to raise between $100 million and $140 million to reduce debt in the merged entity and pay out hybrid holders, implying a significant haircut to the $150 million they are entitled to.
Artemis Capital portfolio manager Philip Talacek said it was up to Elders to explain its strategy to hybrid holders. "It would seem incumbent on the board of Elders, having made that decision, to explain to hybrid holders the rationale for that and what they are going to do to improve things," Mr Talacek said.
Elders said it released the letters under its own steam and was not asked to do so by the ASX.
Under its proposal, Ruralco plans to leave Elders' automotive division and any forestry assets still held for sale with existing Elders shareholders, while merging Elders' rural services business with the Ruralco business, which would be owned by both sets of shareholders.
Ruralco has insisted any merger would need to be progressed in a co-operative and consensual manner.
"Ruralco's perspective is that Elders' capital position is not sustainable," Ruralco said in its letter to the ASX.
