Elders shareholders are expected to seize the chance to buy more stock in the revived agribusiness as it breaks free of the last shackles remaining from its near-fatal conglomerate experience.
A $102.4 million capital raising is offering the farm services business’ long-suffering shareholders the chance to buy one share at $3.40 for every four they already own.
Many of the historic company’s 15,000 shareholders are farmer clients or staff within its branch network across regional Australia.
Elders shares jumped about 15 per cent in value to more than $4 each late last week after the company confirmed it had already raised $25m from local and overseas institutional shareholders who were backing its plans.
It will use the capital raising to pay for a swag of special hybrid securities still left on its share register after the company’s ill-fated, debt-heavy growth splurge of almost a decade ago.
Elders Finance Limited, which provides banking and finance services to Elders’ farmer clients and others, began buying back the hybrid stocks last Friday for $95 each, having already received about $30m in commitments from eager sellers prior to announcing its offer.
The unusual hybrid stocks have been an uncomfortable part of the company’s listed equity offering since 2006 when they were first issued at $100.
They were a premium investment arrangement created prior to the global financial crisis (GFC) to help fund the expansive activities of then-parent company, Futuris, which moved into forestry, automotive components and even crockery as diversification sidelines to Elders’ mainstream farm sector trading and service activities.
However, like ordinary Elders shares, the hybrid securities (which enjoy priority dividend status) have not paid a dividend or distribution since 2008.
The complicated terms surrounding the hybrids mean Elders can only start paying normal shareholders a dividend after it pays an amount equal to 12 months of back distributions to its hybrid holders.
With the company structure now streamlined and back to a pure-play agribusiness after struggling to survive its $1.5 billion debt load between 2008 and 2013, directors promise to start paying ordinary dividends by the end of the 2016-17 financial year, but must first clear their hybrid hurdles.
Managing director, Mark Allison, conceded some hybrid security holders still may not wish to sell, but given many had acquired these shares at a considerable discount when their value had slumped below $50 each during the past five years, the offer price was attractive.
Even against the the weighted average price of the hybrid stocks in the past year the buy-up offer price represented a premium of 20.3 per cent.
“It’s an excellent opportunity for hybrid holders to monetise their investments and an opportunity for Elders to normalise its capital structure,” he said.
If some hybrids remained they could be converted to ordinary shares at a later date, or directors may choose let them remain on the books and eventually pay a distribution.
Meanwhile, the company hoped for even more share value growth as a result of its capital raising and hybrid buy-up.
Mr Allison said Elders’ current $320 capital value would be boosted about 25pc after effectively swapping its hybrid debt for fresh equity.
Another factor with helpful implications for shareholders, and the share price, was about $247m of tax losses still recorded on Elders’ balance sheet following the ill-fated Futuris years.
These losses were effectively acting as tax credits as business profits recovered.
"It's one legacy issue which is actually a positive," he said, noting the potential benefits for franked dividend payments.
Elders is aiming to pay about 35pc of its underlying profits when dividends resume.
Mr Allison said shareholders and hybrid investors had been very patient, but removing the last shackles of the company’s recent tough times would help its new business momentum.
Elders continued to have a pipeline of smaller scale asset acquisition plans to work through, including building its real estate branch network, financial services opportunities, and adding to its agency and farm technical advice network in localities where the company was under represented.
“We’ve completed a few acquisitions in recent times, funded from existing cashflow, and we expect to maintain that strategy in the coming financial year,” he said.
All acquisitions were being selected for their ability to deliver at least 20pc return on capital.
