ASX listed Alterra is taking a page out of Wesfarmers’ playbook with a proposal to demerge its carbon forestry business and focus on the development of its agribusiness projects. The move is expected to realise the full value of the carbon business and generate a potential windfall to shareholders who will now own 85% of the carbon business in their own right whilst retaining their Alterra shares.
ASX listed Alterra is taking a page out of Wesfarmers’ playbook with a proposal to demerge its carbon forestry business and focus on the development of its agribusiness projects.
Wesfarmers’ demerger will effectively create two companies, a lower growth but cash generating business in Coles and a higher growth business in Wesfarmers.
With striking similarities in structure to the Wesfarmers/Coles de-merger, Alterra will issue 85% of the shares in its carbon credit generating forestry business directly to its shareholders with the ASX listed company retaining a 15% stake in the private entity to be named Carbon Conscious Investments.
Demergers are a way of attempting to realise the full value of an entity that resides within a larger entity when the business to be spun out to shareholders may not be fully valued with the parent entity.
The strategy actually worked quite well for Wesfarmers with its shares climbing to a high of $52.53 in August this year before moderating to $47.49 on 13 November, which still represents a 15.2% increase from the closing price of $41.20 prior to the announcement on 16 March.
Market indications were initially positive about the Alterra announcement with the company’s stock lifting from 4.6c to 4.8c in early trade.
The carbon forestry business, which consists of carbon property rights, licences and contract management agreements, is expected to generate revenues of about $21m between the 1st of January 2019 and the 30th of September 2027.
It will become the primary asset and key focus of the new unlisted company which is currently a wholly-owned subsidiary of Alterra.
The company says that quarantining the carbon business in this manner will ensure the consistent cash flow it generates is not exposed to any risk that may arise in the future from Alterra’s agribusiness ventures.
The new business will also focus on keeping costs down whilst maximising cash flows, which should create consistent annual earnings in the hands of individual shareholders.
Alterra will retain the existing cash, land and other assets, allowing it to focus on its existing dairy operations and other new agribusiness opportunities.
The demerger is expected to enhance Alterra’s capacity to raise funds and both companies will also be able to undertake more targeted marketing due to a clearer picture emerging of what they respectively offer.
Managing Director Andrew McBain said: “The demerger would provide Alterra shareholders with continued exposure to the long term and consistent cash‐flows of the existing Carbon Business and enable Alterra to be more aggressive in relation to developing new business opportunities.”
Alterra, then known as Carbon Conscious, was contracted to establish carbon forest estates for carbon sequestration between 2009 and 2012.
However, political uncertainty in relation to carbon markets and pricing due to the election of the Liberal-National Government in 2013, has meant that no new significant agro‐forestry projects for carbon sequestration have been established since that time.
The company started focussing on re‐building its balance sheet and identifying new agribusiness opportunities for growth with a focus on dairy in 2015, before changing its name to Alterra in 2016 to reflect its new ventures.
Alterra purchased the Dambadgee Springs property near Dandaragan, WA, in March 2017 as a prospective diary site using the heralded “System 5” method that promises higher milk yields.
System 5 dairy farming, which is common in the US but has not yet made it to W.A, works on the theory that cows produce significantly more milk when they are made comfortable, and not exposed to the elements.
It involves providing climate controlled barns for the cows that affords them some respite from the elements and enables them to be walked shorter distances every day to be milked.
Dambadgee Springs was assessed as being highly suitable for the development of an intensive dairy operation and is currently leased for cropping purposes, generating positive cash‐flows, while feasibility studies are conducted.
The company is now focussed on securing water access, refining environmental management plans and applications and securing a milk off‐take contract.
Alterra is also reviewing dairy opportunities in Queensland and is in ongoing discussions regarding the potential to establish a large‐scale dairy operation to supply milk to the Queensland domestic market.