Commentary3:46 PM, 1 Apr 2010 Stephen BartholomeuszA Bright idea...

Commentary
3:46 PM, 1 Apr 2010
Stephen Bartholomeusz
A Bright idea for CSR

Bright Food?s expression of its continuing interest in CSR?s sugar and renewable energy businesses won?t be as irritating to CSR as the Chinese company's previous approaches.

Not only has Bright Food again significantly upped the ante, from the previous indicative offer of $1.5 billion to $1.75 billion, but its restated interest now looks like a safety net for CSR, providing it with a viable fallback option at a defensible price should it fail in its appeal of a Federal Court judgment that derailed its proposed de-merger.

The Full Federal Court this week reserved its judgment on the appeal against Justice Margaret Stone?s rejection of CSR?s application to hold a shareholders? meeting to approve the demerger of the clumsily-named Sucrogen.

She based the rejection on a very logical, but extremely non-commercial, view that a demerger would make it less likely that CSR would be able to meet its future asbestos liabilities.

Given the nature of asbestos liabilities, and the reality that new claims could still be emerging for decades to come, the reduction in CSR?s financial capacity if the demerger should occur makes it impossible to argue against that logic ? which isn?t to say that a post-demerger CSR wouldn?t have ample capacity to meet its obligations.

If the Full Federal Court upholds the judgment, CSR?s structure could, however, be frozen in time and unable to adapt to changing circumstances and the market?s demands. Its building materials and sugar businesses would be forever locked together.

Which is where Bright Food could provide the solution. If CSR sells Sucrogen to Bright Food it would be awash with surplus cash and capital ? especially after raising $375 million of equity last year to ensure both the continuing CSR and the de-merged Sucrogen have strong balance sheets,

A really stringent reading of the Federal Court judgment might conclude that the surplus capital would itself be trapped within CSR, given that any distribution of it would result in a reduced financial capacity. CSR, however, apparently believes it would at least be able to distribute any excess over the book value of the Sucrogen assets and perhaps the proceeds of the equity raising.

With the increase in the Bright Food offer, that could mean that between $850 million and $1.2 billion could be returned to shareholders in the event of a sale.

Bright Food has been astute in increasing the value of its proposal. Even if the Full Federal Court were to uphold CSR?s appeal and clear the way for the demerger to proceed, the $1.75 billion on the table, albeit conditionally, has to be taken very seriously as a potentially cleaner and more certain way to monetise the businesses.

That means Bright Food isn?t necessarily again out of the game if the court doesn?t push CSR into its arms. Indeed CSR?s willingness, this time, to commit to entering into discussions with the Chinese group before it knows the outcome of the appeal suggests that it also recognises that Bright Food represents not just a fallback option, but an alternative that deserves serious consideration, regardless of the fate of the appeal.