02/09/2003 - 22:00

Selling off the farming arm

02/09/2003 - 22:00


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IT seems that we have seen our first results from negotiations for a free trade agreement with the US, with many Western Australian farmers ending up winners even though no deal has been signed yet.

Selling off the farming arm

Selling off the farming arm

IT seems that we have seen our first results from negotiations for a free trade agreement with the US, with many Western Australian farmers ending up winners even though no deal has been signed yet.

They are winners because they hold Wesfarmers shares, the WA conglomerate that agreed to sell its Landmark rural operation to wheat marketer AWB for a handy $825 million late last week.

The price was seen as extraordinary by the market that valued the Landmark division at no more than $600 million and probably down around $440 million.

The market also hailed Wesfarmers for selling.

Given the rural business goes to the heart of the original Wesfarmers, which has grown out of its farmer cooperative roots, it may have been a tough decision to part with this particular business.

(As an interesting aside, Michael Chaney reckoned he hadn’t copped any bad feedback from farmers about the decision when I spoke to him earlier this week).

The divestment was a coup that, yet again, upstages Futuris Corp once a Wesfarmers rival for the crown of WA’s top company.

Futuris, which owns rural services giant Elders, was a target of AWB but was also resistant to its overtures.

So what has all this got to do with a free trade agreement with the US?

AWB’s biggest asset is its regulated position as the monopoly purchaser of Australian wheat – known as the single desk.

And that regulated position is under threat in the current round of negotiations between trade officials from the US and Australia, so AWB has been seeking to find other assets that will underpin its business.

The fact that it has been prepared to pay so much is both a windfall to Wesfarmers shareholders and an indication of just how concerned it has become about the prospects of the free trade agreement coming to fruition.

If you are interested in further news about the free trade agreement negotiations, take a peak out our extended coverage on it in our Trade pages this week.

Where to for Wesfarmers?

FOLLOWING the unexpected sale of Landmark the big question being asked of Wesfarmers is what next?

The $825 million price tag leaves Wesfarmers virtually debt-free – something many householders would love but a position that is not entirely considered efficient use of capital by the market.

Still, I’d be prepared to be labelled inefficient if I could sell my assets at twice the market valuation.

So firstly, a return of capital is a very likely scenario and one that Wesfarmers chief Michael Chaney confirmed was very much on the cards.

“Having a huge cash chest is not that useful,” Mr Chaney told me.

“Its better to give money back to shareholders.”

In the event of another purchase, Mr Chaney said scrip was a better way to pay for things than cash.

And by giving back cash today, he can increase his debt to equity ratio a little and make his balance sheet structure more to the market’s liking.

But apart from a return of capital, Wesfarmers is clearly on the hunt again.

The market rules and Wesfarmers own tight information controls (no-one had revealed the Landmark deal even though it was going on for two months) means it won’t really flag its options except where it has to.

It has already shown an interest in energy beyond digging coal and this week let it be known that it and Alinta were considering making an offer to acquire the Dampier to Bunbury natural gas pipeline off its ailing parent Epic Energy.

Though Mr Chaney won’t be drawn on what sectors, such as energy or insurance, the company had targeted.

He said Wesfarmers didn’t work that way – in targeting particular fields.

It simply looks for good investment opportunities as they come along.

Whatever the case, I like the words of Paterson Ord Minnett analyst Rob Brierley.

“They will not be rushed.”

Liquor licensing

FINALLY we are starting to see some sense coming into the liquor and hospitality industry.

Western Australians face overly restrictive rules on how and where they can consume alcohol and some changes announced this week, to allow liquor stores to trade on Sundays and allow restaurants to serve drinks without food, are welcome.

While the first does take away an advantage of locally-owned hotels over the bottle shop market presided over by Coles Myer and Woolworths, it also ends a ridiculous restriction that allowed hotels to open their bottle shops when stand-alone operators could not.

But the hoteliers are probably most displeased with the relaxation of rules allowing restaurants to serve liquor without providing food.

Many people want a greater choice of venues at which they are allowed to drink.

And, while it is fair to admit that hotels have not had life easy, they have used objections to liquor licensing rules to make it too hard for hybrid competitors to open in their midst, restricting the evolution of liquor outlets that best suit what customers want.

Both these proposed changes will mean that hotels face significant new competition but this is something of their making.

Society has changed and temperance is no longer the issue it used to be.

That relates to both Sunday trading and the accessibility of alcohol.


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