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Elders finally calms investors' nerves
MALCOLM MAIDEN
September 4, 2009

THE travails of Elders this week as it strived to get its balance sheet under control with a $400 million-plus equity raising serves notice that while fears of a market meltdown have receded, lenders and investors are still very cautious about companies that are stressed.

Last night, Elders was said to be close to signing off on an underwritten raising that will raise what it needs, but it is quite a different deal to the one it launched at the beginning of the week, with more shares issued at a deeper discount, and the group's bankers granting better terms on a debt reconstruction.

Elders' brokers, RBS and Goldman Sachs JBWere, approached institutions on Monday with a plan to raise about $450 million, through a placement of up to $250 million of shares at 25¢ each, a non-renounceable 1-for-1 share issue and a retail share purchase plan follow-on.

The shares were to be priced at a 36 per cent discount to Elders' share price of 39¢ before it went into a trading halt and opened up the negotiations, but that was not enough.

The feedback was that Elders needed to go even lower - not because the amount that it was seeking did not promise to dramatically improve its balance sheet, but because of uncertainty about the pace of the earnings recovery that chief executive Malcolm Jackman had to deliver.

Jackman has been selling off bits of Elders to repay debt, drawing the group down on to its traditional rural services business, which operates through a network of owned and franchised outlets.

But there are still at least two assets to be sold - a half-share of the HiFert fertiliser manufacturing and distribution business, which is being offered at about $80 million, and the group's car components business, which will not be offered until economic conditions improve - and the rural services network has been underperforming, because of tough weather conditions and the economic downturn.

The institutions considered it all, and enough of them to put the issue at risk told Elders that 25¢ would leave them too exposed given that the group was only predicting a recovery in gross earnings from about $17 million to about $60 million in the first year.

They wanted more insurance, and Elders moved over to plan B: it would raise the same amount in an expanded issue of shares priced at just 15¢ a share, and it would simplify the equity raising by eliminating the rights issue component. The funds would be raised through a placement and then a share-purchase plan offer to retail shareholders, with RBS and GSJBW underwriting, as originally proposed.

Even then, however, more was needed. The institutions also argued that Elders' banks were not shouldering their fair share of the rescue.

After it completed a staged sale of its 43 per cent stake in Australian Agricultural Company in May, Elders still carried about $1 billion of debt supporting assets with the same balance sheet value.

Elders and its adviser, Caliburn, secured a three-month debt renegotiation extension soon after, setting September 30 as the deadline for a reconstruction that was always going to be capped off by a monster share issue.

Late in July, Jackman announced that Elders would sell its rural insurance book to QBE, and the insurance agency business it runs through its rural agencies would be part of a joint venture with the insurer.

QBE agreed to pay $270 million cash and another $45 million for 112.5 million Elders shares at a price of 40¢ each, and, crucially, hold the shares for at least a year and support the share raising that was being prepared.

The QBE deal was rolled into the larger share issue that Elders launched on Monday after it agreed to sell a timber processing business to Gunns for $100 million, and it was clear from the outset that the share issue was intertwined with Elders' debt negotiations with its lender banks - the big four Australian banks, France's BNP group, HongKong & Shanghai Bank and Citigroup.

If the share issue does not happen, Elders will hit the wall on September 30, its debt renegotiation deadline. Receivership will be difficult to avoid. And an equity raising is conditional on a renegotiated debt deal - even one pitched 44¢, or 61 per cent, below market, and a sobering 95 per cent below Elders' peak price of $2.83 in July 2007, just before the global debt crisis erupted.

The institutions believed that Elders' debt reconstruction deal was priced as if Elders would still be in a fight for its survival after the debt reconstruction and the share issue had put that issue beyond doubt. And Jackman and his advisers almost certainly knew they were right.

Once armed with the feedback from the institutions, they were able to report back to the banks and tell them that the share issue was in jeopardy if the debt terms were not sweetened. It was, in effect, a request for the banks to take slightly less insurance out on Elders.

Late yesterday, the word was that the banks were inclined to agree to take a haircut, by charging lower fees on the debt reconstruction, and by also charging a lower interest rate on the smaller debt load that Elders will carry. Those moves, if confirmed, will lower Elders' debt costs and boost its future earnings.

Nothing is certain until the contracts are inked, and it was unclear yesterday whether Elders' 15 per cent shareholder, the London-based M&G funds management group, would be participating in an equity raising.

Elders is therefore still on edge. But people working on the deal were still confident that an acceptable balance between the banks and the share investors was within reach, and that Jackman would get his chance to rebuild the iconic Elders brand