re: bpc - gottleibson article From The AustralianExcellent...

re: bpc - gottleibson article
From The Australian

Excellent summary - lays it all out - good investment if they pull it off.

Fielding Fielder a fillip for Burns

August 20, 2003
THE 2002-03 Burns Philp accounts graphically show the magic of the Goodman Fielder acquisition. But they also reveal a weakness in the old Burns Philp operation.

Burns Philp acquired a Goodman Fielder company (minus its flour business) that was earning – before interest, tax, depreciation and amortisation (EBITDA) – around $320 million a year.

For years, people had looked at the Goodman Fielder food giant and thought there was a fortune to be made by tapping its hidden wealth and high costs. But not until Burns Philp did anyone have the courage to try.

Burns Philp's major shareholder, Graeme Hart, believed that, in Tom Degnan, he had a chief executive who could uncork Goodman's hidden wealth. Degnan now estimates that there are at least $70 million in available cost reductions which would boost the Goodman EBITDA from $320 million to around $390 million.

The Burns Philp interest bill in 2003-04, after the acquisition, is expected to be about $280 million – a rise of some $215 million on the level prior to the takeover. So, in summary, Goodman Fielder adds close to $175 million to the Burns Philp cash flow ($390 million less $215 million in extra interest).

As they entered the Goodman Fielder fray, Hart set Degnan a target: "I want Burns Philp to achieve an EBITDA of between $600 and $700 million after the Goodman Fielder takeover."

That didn't look too difficult because Burns Philp was already generating a $300 million EBITDA, but that sum included profits from businesses that had been sold and a currency boost.

In fact, the 2002-03 Burns Philp EBITDA was below $250 million and, in the current year, the company's star performer – North American Yeast – faces a new competitor which will erode yeast prices.

To prepare for the challenge Degnan has slashed his North American costs but still needs to generate bigger earnings from South America following acquisitions to cover the expected $5 million to $10 million US yeast decline. But South American profits do not carry the same weight as those from North America and, naturally, it makes institutions edgy.

The good news in the old Burns Philp business is that the company is planning a further yeast plant in China and longer term it could be an earnings power house.

But in the meantime Degnan can only rely on a $250 million EBITDA from his Burns Philp business in the current financial year. However, if Goodman Fielder achieves $390 million (the base $320 million plus $70 million in cost savings) the combined EBITDA will be $640 million – almost at the midpoint of Hart's target.

The Burns Philp strategy is that food businesses which are No.1 or No.2 in the market have great earnings stability and therefore can be leveraged. By June 2002, Burns Philp had reduced net borrowings to just $700 million because of its cash flows from yeast and spices.

Hart and Degnan have set a target of four times EBITDA as their preferred borrowing level. If Degnan achieves a $640 million EBITDA rate in the current year then Burns Philp's targeted borrowings should be a touch under $2.6 billion.

But Goodman Fielder was a big bite and the net borrowings at June 30 are just over $2.9 billion. (They would be higher but for Hart's option conversion.)

Hart has been careful to structure the borrowing so that most of the debt has a four to five-year maturity.

Nevertheless, the company has some $300 million of debt in excess of its long-term target. But annual gross cash flow is around $350 million.

Naturally, money will be required for capital expenditure, preference dividends, tax etc, but within 18 months or so debt should be back on target. And, of course, once that happens Hart and Degnan will be looking for the next target.

Robert Gottliebsen writes four columns a week for The Australian and broadcasts each night on ABC Asia Pacific TV.