What’s the beef Why cattle exporter Wellard is on the ropes Beef...

What’s the beef
   Why cattle exporter Wellard is on the ropes Beef industry The float of Australia’s biggest cattle exporter has destroyed the most wealth of any recent Australian IPO, writes Aaron Patrick.

   Analyst Belinda Moore got the bad news after the sharemarket closed on the Friday before the Queen’s Birthday long weekend.

   Wellard Ltd, Australia’s biggest cattle exporter, had cut its profit forecast a second time since it was floated on the sharemarket six months earlier.

   The downgrade rendered her $1.45 price prediction hopelessly optimistic. Moore, whose stockbroking firm Morgans helped manage the float, cut her recommendation from ‘‘buy’’ to ‘‘hold’’ and her price target to 61¢.

   Still, she remained a believer in the bright future painted by Wellard’s flamboyant Italian chief executive, Mauro Balzarini, who received $115 million in the float by selling a portion of the company founded by his father.

   ‘‘While the downgrade is disappointing,’’ Moore told clients the following Monday, ‘‘WLD [Wellard] should be able to deliver strong earnings growth over coming years from rising demand for protein, the opening up of new markets and its growth projects.’’

   Three months later Wellard is in even worse shape. The Fremantle-based company is in danger of defaulting on its loans, has tarnished the reputations of the three brokers that managed the float, Deutsche Bank, Morgans and UBS, and left a trail of angry shareholders across Australia.

   Moore has received calls from upset clients. She now advises them to sell the stock, which last traded on Friday at 24 cents and has lost 83 per cent of its value since listing in December. No initial public offering in Australia has destroyed more wealth this year.

   ‘‘It’s extremely disappointing,’’ Moore said in a phone interview before hanging up when asked about her role promoting the stock. ‘‘It looks like it will breach covenants in the first half of 2017.’’

   Rivals are watching closely. If the Wellard business stumbles further, or its creditors lose patience, they could pounce.

   Wellard’s performance raises a tough question for the stockbrokers, lawyers, accountants and other advisers who made $21 million from the sale: did they allow a business caught between record-high wholesale prices and steep fixed operating costs to make over-optimistic profit predictions?

   ‘‘Either management made some poor calls or the world has changed around them,’’ says Michael Fitzsimmons, the managing director of the Melbourne-based JCP Investment Partners, which bought 5 per cent of Wellard. ‘‘We’re pretty disappointed.’’

   Former shareholder Ben Cowan, a Sydney investment banker, says: ‘‘It appears to me that UBS did not prepare this business for public life in its capacity as lead manager on the IPO.’’

   Wellard trades cattle, sheep and processed-meat around the world. Each year it buys about 400,000 animals in producing countries like Australia, New Zealand, Brazil and Uruguay and then sells to countries and regions that don’t have enough to meet demand, such as China, Indonesia, Vietnam, the Middle East and Turkey. The business was founded in 1979 by Balzarini’s father, an Italian livestock trader who wanted to ship Australian sheep to the Middle East. In 2004 the family business was restructured and Balzarini, a successful motocross rider in Italy, was given ownership of the Australian operations, which he was running at the time.

   In an industry gun-shy over adverse publicity from animal cruelty scandals, the extroverted Italian courted attention.

   He promoted the potential of selling Australian beef to hundreds of millions of people in China, Vietnam and Indonesia, who would eat more red meat as they became wealthier. Wellard could become a global player in the cattle industry, a bit like a food equivalent of BHP Billiton.

   Balzarini bought one of Perth’s more expensive homes, a Italian-style villa that was lavish even by the standards of the resources boom. He visited customers around the world in a private jet and happily offered rides to industry colleagues, they said. He was frequently quoted in the press.

   ‘‘He thinks big,’’ says the head of one industry body who works closely with Wellard. ‘‘He has the vision and he talks it up.’’

   Balzarini made enemies too. Two former employees say he has a jealous streak – he dislikes other people getting more attention – and is uncomfortable being challenged. ‘‘If you call a spade a spade then your closeness can turn off like a tap,’’ one says.

   Balzarini says he’s proud of his staff, especially that many stockmen and women rose to managerial positions in the company. ‘‘If a disgruntled former employee wants to anonymously provide character references to a journalist that is a reflection on them, not on me,’’ he says.

   In addition to exporting one quarter of all Australian cattle, rivals feared he planned to become a powerful force in shipping, giving him an outsized influence over the $1.3 billion industry.

   Wellard bought or leased five transporters, including the world’s largest purposebuilt livestock carrier. The company can ship 60,000 cattle or 224,000 sheep from Fremantle, Townsville and Darwin to just about anywhere in the world, meaning Wellard can’t be squeezed by the shipping companies hired by exporters which charge $US10,000 to $US50,000 a day.

   One of the skills of shipping cattle and sheep is finessing pick-up and delivery schedules. If a customer, such as a food producer in Kuwait, wants 20,000 sheep to arrive a few weeks later than originally agreed, an exporter may have to renegotiate access to a transport ship.

   Shipping owners, dominated by the 120-year-old Dutch Vroon group, are adept at exploiting last-minute changes to jack up lease rates. Wellard avoided this problem by taking out long-term leases and building ships. The latest, the nine-deck Ocean Shearer, joined the fleet a few months ago.

   None of its Australian competitors own ships and Wellard promoted the fleet as a key advantage over rivals. ‘‘Vessel ownership provides flexibility to take advantage of higher margin opportunities,’’ the prospectus said.

   But the strategy wasn’t cheap. The Ocean Shearer was built in China for about $US90 million. A single shipment of around 20,000 cattle is roughly worth $20 million.

   A float was portrayed as a way to capture more of the global livestock trade. Critics say it was necessary to keep the business going after it became over-extended investing in farms, farm machinery and other businesses and needed cash.

   Balzarini denies this and says the float had been planned for five years. ‘‘Last year was deemed to be the right time given the significant opportunities that were emerging and this prompted the decision to list,’’ he says.

   Balzarini decided to raise $299 million through a sharemarket float after attempts to raise more money privately fell through, sources said.

   The Balzarini family company, WGH, an acronym for Wellard Group Holdings, got $145 million for selling part of his stake. WGH emerged with 37 per cent of the listed company, Wellard Ltd.

   Another $68 million was used to pay off debt. Stockbrokers, lawyers, accountants and other advisers on the float got $21 million. Only $65 million was reinvested in the business.

   The year before it became a public company the Wellard group made $53 million profit on $512 million revenue.

   In the past Wellard had used suppliers as a source of credit, according to a former supplier, who said they once waited 10 weeks for a $10 million bill to be paid. ‘‘You can imagine how I slept during that time,’’ the person said.

   Balzarini says the company hasn’t not paid a bill in 40 years of buying millions of cattle and sheep. ‘‘At times Wellard, when it was a private company, has made late payments, but this is the exception rather than the rule,’’ he says.

   PricewaterhouseCoopers was hired to do a forensic examination of the accounts. It gave Wellard the all-clear.

   Many investors liked Wellard’s vision for becoming the ‘‘beef bowl’’ of Asia. Nonetheless, live sales of cattle and sheep are a small slice of Australian meat exports, in part because it is easier to slaughter animals in Australia rather than ship them alive to Asia and the Middle East.

   Developing economies are buying more beef, but growth isn’t rapid. Global beef consumption grew 1.1 per cent a year from 2004 to 2014.

   Paradoxically, a boom in cattle prices was bad news for Wellard investors.

   After a few years of little rain that depleted cattle herds in Queensland, many graziers decided to build up their stocks instead of selling.

   With little supply available, the price skyrocketed. The Eastern Young Cattle Indicator beef benchmark hit $7.26 a kilogram last month, its highest ever.

   Operating large ships it couldn’t afford to leave empty, Wellard desperately needed cattle. It became the most aggressive buyer in the market, according to three industry sources, and would offer 5 to 15 per cent more than its competitors, one of those sources said.

   ‘‘Even if I have to spend more money than usual to fill the boats, I will attempt it, as I feel it’s part of my position to keep beef production profitable for graziers,’’ Balzarini told a public meeting in Townsville last September.

   In Indonesia, China and elsewhere, consumers aren’t wealthy and couldn’t afford to pay more for cattle from Australia. The company couldn’t pass on its price increases to its customers, the industry sources said, and was forced to accept lower profit margins.

   Wellard was caught in the classic traders’ squeeze: forced to buy from reluctant wholesalers and sell to price-sensitive consumers.

   Balzarini denies it splashed out on stock and says it has been ‘‘very astute with its livestock purchasing program’’.

   The first external sign something was wrong came on December 30, three weeks after the float, when Wellard said a ship about to leave Fremantle for Israel had lost power in one engine. The problem turned out to be serious, and would cost millions to fix.

   Four weeks later, at Wellard’s first-half results, the company said full-year profits were likely to be $4 million below the forecast made two months earlier.

   Investors were unsettled. It is unusual for a company to run into trouble so soon after going through the thorough vetting process by outside experts of an initial public offering. Two more profit downgrades followed, caused in part by expensive ship repairs, including a second that broke down.

   On August 31 Wellard posted full-year profits of $16 million – one third the forecast in December used to sell the company to thousands of investors. It dropped promises of a dividend.

   Other livestock exporters were surprised Wellard reported even a small profit. Elders said this week it will no longer ship cattle to Asia. ‘‘Everybody in this industry is suffering,’’ says a rival. ‘‘I don’t think there is one company that has made anything out of cattle. We would all be in the red [this year].’’

   Balzarini says that Wellard beat its unprofitable competitors because it controls its own fleet.

   ‘‘We are proud that we were able to achieve a profit in such difficult circumstances, though obviously disappointed that it was not as high as we had believed it would be,’’ he says.

   ‘‘High cattle prices in Australia have placed considerable pressure on the livestock shipping sector.’’

   Meanwhile, insiders are leaving. Director Sharon Warburton, the 2014 West Australian businesswoman of the year, stepped down after eight months on the board. Now chairman of the Northern Australia Infrastructure Facility, a government credit provider, she wouldn’t discuss her reasons for leaving.

   Wellard’s general counsel and company secretary, Yasmin Broughton, quit after six months. Now a commissioner for the West Australian Insurance Commission, Broughton doesn’t mention Wellard on her LinkedIn profile. She declined to comment.

   Chief financial officer Gary Wheeler was moved out of the business to become chief executive of WGH in July.

   The general manager of the sheep division, Harold Sealy, is preparing to leave too.

   Some investors, initially convinced that Wellard could become an Australian food success story, now feel the company was floated at the wrong time and promoted too aggressively.

   The Australian Shareholders’ Association, which represents individual investors, says it is concerned about the profit downgrades so soon after the float. It also worries about a $15 million debt owed by WGH to Wellard, which Balzarini has acknowledged might not be paid.

   ‘‘Our greatest unease is the related-party transaction between WHG and Wellard,’’ said an association spokesman, Barry Nunn. ‘‘We don’t know enough about it.’’

   Even Moore, the Morgans analyst who promoted the stock, now concedes that it may not survive in its existing form. ‘‘This is obviously not a good look for Wellard and raises concerns about the company’s future,’’ she told clients after the recent resignations.

   UBS declined to comment. Deutsche Bank didn’t respond to a request for comment.

   Balzarini plans to move to Singapore, where the top tax rate is 20 per cent. He took a $6 million loss on the sale of his house. He doesn’t think he has anything to be sorry for.

   ‘‘You apologise when you do something wrong,’’ he told The Australian Financial Review two weeks ago.

   ‘‘I don’t think we have done something wrong. I’m sorry for investors because this is not what I wanted them to get out of the company. I understand their frustration. I am a big shareholder.’’

   Wellard was caught in the classic traders’ squeeze: forced to buy from reluctant wholesalers and sell to price-sensitive consumers.

Morgans analyst Belinda Moore initially promoted Wellard but now says recent resignations raise concerns about the company’s future.



Michael Fitzsimmons, managing director of JCP Investment Partners, which bought 5 per cent of Wellard, is ‘‘pretty disappointed.’’