Why bid may worry Primac!

This was the headline of an article, featured in the Financial Review, back on the 30th September 1996. Writer, Michael O’Meara, spelt out to his readers just how tough things were in those turbulent days at Primac in the mid nineties.

Thanks to Wayne Fischer for this contribution (October 2022).

Michael O’Meara Financial Review

Sep 30, 1996 – 10.00am

Two days after Australia’s biggest rural merchandising company IAMA Ltd unveiled a hostile $43 million scrip takeover for Primac Holdings Ltd, the target company’s chief executive, Steve Morrow, was contemplating life on the golf course.

The day before, Morrow had met Primac’s other war council members – chairman Robin Hart, fellow directors Tim Fairfax and Peter Annand, McCullough Robertson lawyer Bret Heading and leading Brisbane PR spin doctor Stephanie Paul.

By Morrow’s own admission, the golf game did not go well.

Primac was facing its second takeover offer in just over a year. The last time round, the venerable Queensland pastoral house warded off a 16.8 per cent shareholder, Victorian-based fertiliser group Pivot Ltd, which made a $48 million cash offer.

Normally men in Morrow’s position would be totally relaxed and putting their feet up on the 19th green. For a start, the IAMA offer is all paper, which is not popular with investors in the current market.

More extraordinarily, the offer (in effect $2.52 – as compared with the $2.84 cash Pivot was offering) was launched at a substantial discount to Primac’s market price at the time of $3 to $3.10. And the current IAMA offer is conditional upon 90 per cent acceptance.

So why is Morrow a concerned man?

He and his board defeated last year’s hostile bid for Primac by promising shareholders great things in the future. The shareholders kept faith but should now be sorely disappointed to see that Primac managed to achieve the earnings it promised in last year’s Part B takeover response only by selling off $6.4 million of assets.

The sale of parts of the Primac farm realised enough in abnormal profits for Primac to just scrape in with a $4.3 million net profit in line with projections.

Of more concern, however, is that the Primac Part B forecast 25c-a-share annual dividends over the next three years.

And in 1996, that dividend payout accounted for 98 per cent of profit.

Further, the 1996 profit statement was accompanied by a warning from chairman Hart, who said that while Primac retained market share in its key NSW and Queensland wool-broking operations, lower volumes and prices made these businesses unprofitable.

And the news gets worse.

Primac’s livestock agency business suffered significantly lower prices in the second half of the year despite overall cattle numbers being up on the previous year. Hart said it was unusual for both wool and cattle markets to suffer a slump simultaneously.

“Wool prices have improved over the past six weeks and cattle prices also appear to be stabilising,” he said. “However, we recognise this is currently a volatile market and in anticipation of another difficult year, directors are not confident of being able to maintain the current level of dividend in 1996-97.”

These are hardly the battlefield conditions a target company would want when facing a new enemy.

IAMA declared its offer soon after Primac reported its annual results.

Primac is still awaiting IAMA’s formal offer document of nine IAMA shares for every 10 Primac shares, which values Primac shares, in effect, at $2.52 a share.

Meanwhile, it has urged the Australian Securities Commission not to register the offer, claiming the option agreement IAMA has struck with Pivot is illegal.

Primac has labelled the offer as totally inadequate and did not take into account the upside due in both the cattle and wool businesses which were at cyclical low points.

And as one Primac insider said, there is a degree of comfort in that the current offer is scrip. That sentiment is largely shared in the investment community. According to one Primac investor, the IAMA offer has a “snow flake’s chance in hell” of success.

Which begs the question as to what IAMA’s next move will be.

Some have suggested this is an opening teaser by IAMA to draw Primac to the table to consider a possible merger. Others say a sound cash offer could have a number of the leading institutional Primac shareholders falling over themselves to accept. Elders Australia and Wesfarmers have been mentioned as potential counter-suitors.

But the other question being raised is what arguments, apart from the standard unattractiveness of scrip offers and the fact the current offer is sub-market price, the Primac board and its advisers, SBC Warburg, will raise to reject the IAMA offer.

Shareholders could be forgiven for being a bit cynical this time round when poring over yet another Primac Part B takeover response. Given the optimistic profit and dividend forecasts used last year to fend off the Pivot offer, if this latest defence document contains too many “gonnas”, it is likely to be treated with some suspicion.

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