goodbye to the baker

30 September 2005

BPC: Goodbye to the Baker
Burns, Philp & Company (BPC) plans to partially divest its baking and spreads divisions via an initial public offering (IPO). The ‘new’ company will be called Goodman Fielder (GMF), and will be listed on the ASX and NZSX. The market has reacted positively on the news, pushing the stock 1.5 cents higher to $1.135. However, Macquarie Research Equities (MRE) maintain their neutral recommendation believing that BPC appears fully priced at these levels.

Complex transaction with scant detail provided. The IPO will also include the NZ Dairy Foods business (NZDF), currently owned by BPC's 57% shareholder Graeme Hart. NZDF will be bought by GMF on the IPO multiple. BPC will retain the snacks division. Legal restrictions on the ‘pre marketing’ of an IPO dictated that the ASX release was brief. At the same time management was unable to make comment beyond what was in the release. A prospectus is expected to be available within a ‘few’ weeks.

This could signal peak earnings for baking and spreads. The ‘partial’ divestment decision was made by the board which believes that significant value had been created, and is therefore appropriate at this time to realise the capital for redeployment. MRE have previously written that the former Goodman Fielder businesses were at their peak. This transaction could arguably be taken as support of this belief. BPC will retain a ‘significant’ shareholding in the newly listed entity (GMF), which may provide some comfort to potential IPO investors.

Snacks to be retained… for now. MRE had previously received strong trade feedback that the snacks business was on the verge of being divested. This announcement could suggest that these rumours were misconstrued. Alternatively, it is possible that BPC will sell snacks separately.

MRE value BPC at $0.85–1.18 per share. MRE have valued Baking and Spreads based on an IPO range of 7-8.5x prospective earnings. The Snacks division valuation is based on a 9.7–14x earnings with the top end premised on a contested bid for this division.

Will BPC return the cash to shareholders or look for the next deal? MRE estimate that BPC could hold between $492m–1.2bn in cash post the IPO. This broad range is dictated by the IPO sale price and the stake it retains in GMF. History would suggest that BPC will look for the next acquisition, and then leverage up, rather than return the cash to shareholders. Hart has proven himself apt at trading businesses, and so the market may back him to continue this form.

MRE retain their neutral recommendation believing that investing in BPC today is a bet on
management’s trading ability. This view is based on the lack of clarity on an IPO share price, and associated uncertainty about the use of funds raised.