ANALYSIS: CBH has served WA grain growers for more than 80 years, but debate is raging about whether now is the time to kill the co-op.
ANALYSIS: CBH has served WA grain growers for more than 80 years, but debate is raging about whether now is the time to kill the co-op.
Farming can be a lonely business, but right now about 4,150 grain growers in Western Australia are sharing a common thought about the truth of the saying that ‘a bird in the hand is worth two in the bush’.
The bird in this case is CBH Group, a business that started life as Co-operative Bulk Handling, with wheat-growing farmers as its only shareholders.
Today, it is their children (and grandchildren) who are confronting a dilemma that can be found in first word of its original name – co-operative.
The question that is causing heated conversations from Northampton to Esperance is whether the time has come to kill the co-op, which has served farmers well since 1933, and accept a takeover bid that would be the first step towards listing CBH on the stock exchange.
In theory, a listed CBH would be knocking on the door for a spot in the top 150 ASX stocks, thanks to its annual turnover of around $4 billion and a profit of $82.7 million last year, which was well down on the $149 million earned in 2014 due to a bigger wheat crop in that year.
On a total assets basis, which includes grain-receival systems, handling, storage and marketing functions, CBH is worth $2.17 billion, which would slot it into 118th spot on the ASX.
The size and success of CBH make it a desirable takeover target, but the bid from Australian Grains Champion (AGC), at it currently stands, seems doomed to fail, for several reasons.
The offer, billed as a $1 billion demutualisation, is legally and financially complex thanks to the nature of CBH’s cooperative roots, and will require a seven-stage process to be completed, plus the approval of 75 per cent of shareholders.
That final point is most likely to thwart AGC’s bid, because it requires more than 3,100 CBH shareholders (if everyone votes) to succeed; and the only way many farmers are going to agree about anything is if there is a compelling case – plus a fistful of cash.
AGC, which has the backing of a number of senior CBH shareholders and the Sydney-based grains dealer, Graincorp, argues that there is a generous cash component incorporated in its offer, but shareholders require a calculator and patience to figure out exactly what it means to them (see proposal details, below).
The fact that shareholders in CBH (or ‘grower members’, as the co-op prefers) do not know the precise value AGC is putting on their company, or the exact amount they might get paid, or even when that might happen, are huge holes in the proposal.
Most shareholders will be confused by the deal as it now stands, which means they will opt for the certainty of CBH as they know it (the bird in the hand) rather than the appeal of an unknown cash payment, and an uncertain number of shares in a stock exchange-listed company (two in the bush).
Some CBH shareholders might even consider Graincorp’s recent share market performance as a guide to what might happen to the value of their shares in a listed CBH; Graincorp has fallen by 26 per cent since May last year, from $10.35 to recent sales at $7.62.
Whether the proposal from AGC has been over-cooked by legal and financial advisers is an interesting question, because a simpler proposal might stand a greater chance of success as cooperatives, by their nature, are throwbacks to an earlier era and unsuitable in the modern business environment.
What was a good idea in 1933 – or in 1844 when the cooperative movement got its official start in England as a way of farmers sharing costs and jointly marketing their produce – does not seem such a good idea in 2016, when giant commodity-trading companies dominate agriculture with almost unlimited financial muscle and worldwide distribution systems.
The international leaders in the grain industry include: US-based Archer Daniels Midland, which owns 19.8 per cent of Graincorp after its $3.4 billion takeover bid was rejected in 2013; Bunge (once Dutch, now US based); Cargill of the US; Glencore of London; and Louis Dreyfus of France.
Any one of those could join the CBH takeover game if/when the AGC bid fails; if not as a potential bidder before or after the WA grains leader lists on the stock exchange, then certainly as an increasingly active competitor in the world’s hottest commodity sector – food.
While CBH’s drift into the sights of rival grain traders is an inevitable result of its antiquated ownership structure, the people running it can be proud of what the co-op has achieved in providing essential grain handling and marketing services for several generations of farmers.
Some of the success can be attributed to WA’s isolation and vast distances, and the fact that someone has to coordinate grain transport systems; attributes that assisted with the success of another famous WA co-op, which helped create Co-operative Bulk Handling – Westralian Farmers, better known today as Wesfarmers.
The historic link between CBH and Wesfarmers will be hitting a nerve with some CBH shareholders, who have profited handsomely from the demutualisation of Wesfarmers as it has evolved from its modest farmer-owned roots into Australia’s eighth biggest stock-exchange listed business with a value of $29 billion.
No shareholder in Westralian Farmers expected anything like that in 1984 when they voted to demutalise their co-op, in a process somewhat similar to the one confronting CBH shareholders today.
Back then there was a fierce debate and marathon meetings, pitting believers and non-believers against each other over the appeal of co-op status, which returned profits to shareholders from trading activities in the form of rebates on goods and services. Dividends were, and remain, a foreign concept in the co-op movement.
The dream of CBH replicating Wesfarmers is undoubtedly lurking in the background of the AGC takeover bid, even if unsaid, with spokesman for the bidding company relying on arguments of the sort that got Gough Whitlam elected as Australian prime minister in 1972 under the famous slogan of ‘it’s time’.
Unfortunately, as the matter now stands, the board of CBH is almost certain to reject the AGC proposal, not so much on the grounds of it not being fair or reasonable (which it probably isn’t), but more because it is almost impossible for the board to advise shareholders what it means for them in monetary terms, or future grain transport and storage services.
The process, which could only have been designed by a lawyer with spare time on his or her hands, started at stage one when AGC submitted its proposal; CBH directors, quite correctly, described that offer as “unsolicited, unconditional, non-binding, and indicative”.
To move from stage one to stage two, the CBH board needs to sign a ‘process agreement’ by March 18, which is highly unlikely to happen.
If, however, the proposal moves to stage two, a due diligence process starts that will examine tax matters and other details necessary for the preparation of ‘scheme documents’, which need to be approved by the Registrar of Co-operatives and the WA Supreme Court before being mailed to the 4,150 CBH shareholders.
Stage 3 is when 75 per cent of shareholders who lodge a postal vote must agree so it can move forward (after another Supreme Court hearing) to stage 4, when shares in the co-op are converted to shares in AGC, followed by stage 5 when $600 million in cash is distributed (with the amount per shareholder based on the average quantity of grain delivered over the past five years).
Stage 6 and 7 is the ASX listing, the point at which CBH shareholders discover how much their new shares in AGC are worth.
Complex is one way of describing what has been proposed. Tortuous is another.
Who gets what in CBH shares?
Exactly what CBH is worth will be calculated in two ways – firstly via an independent experts report, and then by the stock market.
For existing shareholders, however, there is a procedure through which they must pass before they know what their holding might be worth.
The four steps to a value are:
• calculating the averages tonnes of grain delivered by the grower to CBH over the past five years;
• the number of co-op shares owned by the grower;
• the value set by investors seeking to buy AGC shares on the stock market; and
• total CBH shares issued and total tonnes handled by CBH over the past five years.
As a guide, a shareholder delivering an average of 300t tonnes of grain per year over a five-year period can expect a cash payment of $70,000 plus 125,00 shares in AGC.
A grower delivering 30,000t a year on average over a five-year period can expect a cheque for $790,000, plus 1.315 million AGC shares.
The nature of the valuation process makes the proposal particularly attractive to big growers. However that’s where another problem emerges, because there are many more small growers and they all have a vote, and will be the people who look most closely at the bird-in-the-hand argument when it comes to accepting what AGC is proposing.
Tim Treadgold and Simon Withers have each written articles on CBH Group this week. They were written independently. See Simon's article here.
