The corporate front was surprisingly busy in the past quarter with companies getting shareholder approval to undertake transactions aimed at reviving their operations.
One would have expected depressed activity owing to developments taking place on the political front.
Star Africa, CFI and Interfresh are some of the firms that have managed to convince shareholders to approve their proposed deals. Over the past week Seedco also published a circular to shareholders advising them of an EGM to be held on October 30 2013.
Seedco is 49,94% owned by Aico and for a long time the holding company had been mulling a series of transactions to capitalise the group. Finally, in a fortnight, shareholders will be asked to approve one of these transactions that will hopefully keep the group afloat. Will this be enough or is it just a little bit too late?
The transaction that Seedco seeks to undertake will be done in two stages. Under stage 1, the company will raise US$10,2 million through issuing 10,273,048 shares at a subscription price of US$0.9925.
At the same time Aico will sell 20,546,096 shares, 10% of its stake in Seed-Co, to Vilmorin & Cie. On conclusion of stage 1 of the deal, Vilmorin & Cie will hold approximately 15% of Seed-Co’s issued capital.
Upon placing shares with Vilmorin & Cie, Seedco will grant the company the right to purchase a further 27,389,433 shares at US$1,0921 thereby unlocking US$29,912,000.
The option is to be exercised within 12 months of concluding stage 1. Vilmorin & Cie will have to pay a non-refundable deposit of US$2,991,200 as a premium which is deductible from the total subscription amount if the option is exercised. In the event that Vilmorin & Cie exercises its call option under the second phase, the latter will end up owning 25% of Seed-Co whilst the shareholding of Aico will decline to 33,03%.
In total, the deal will unlock US$40,1 million for Seedco under both the first and second phases of the transaction. The company has indicated that it intends to channel US$21,3 million towards debt retirement whilst US$18 million will be used for capital expenditure.
Retiring expensive borrowings will help lower both the company’s gearing position and, ultimately its interest bill. Finance charges gobbled up US$7 million in the twelve months to March 31 2013. Other benefits that will trickle down to Seedco include improved access to breeding and research together with training and development expertise.
It is beyond doubt that Vilmorin & Cie has this potential considering that it is the fourth largest seed company in the world. The company has strong competences in vegetable seeds and is also a top player in field seeds, namely, corn wheat and oil. Overall, the transaction will give Seed Co the competitive edge that it requires in light of the competition creeping into the continent from global seed players.
Parent company Aico, on the other hand, will realise US$20,4 million for its 10% shareholding. Aico is yet to communicate with the market what it intends to use the money for but it will be invested in either the FMCG or cotton businesses.
Whilst Aico management should be credited with finally making a move to rescue the company, is reducing their stake in Seedco the best way to go? Of the three Aico subsidiaries, the seed business appears to be the only one that is solid when compared with the other two. Is it that the company could not secure buyers for the cotton and FMCG units?
Capacity utilisation remains low at Olivine and the company is struggling to match competition from imports. Production costs per unit remain high, a function of aged machinery that the company is using. Aico has invested a total of US$12,5 million in the business but it continues to record losses. Additionally, the pricing and supply of utilities in the country continues to be unfavourable to manufacturing firms.
The cotton business also has its share of problems currently. Locally, production volumes continue to decline as farmers switch to tobacco, owing to soft lint prices, except in areas with unfavorable climatic conditions.
Merchants are also now reluctant to fund the crop as side marketing remains rampant. Globally, cotton production figures continued to exceed demand for the fourth season in a row and powerhouses such as China are sitting on huge stockpiles.
The International Cotton Advisory Committee recently disclosed that it estimates world cotton production to decline to 25,5 million tonnes in the 2013/2014 season from the 26,9 million tonnes recorded last season. Stocks are also anticipated to increase to 20,3 million tonnes from 18,3 million tonnes recorded in the 2012/13 season. Such developments will result in lint prices further weakening in the short to medium term lowering revenues and earnings for Aico’s cotton business.
It would also appear that the US$20,4 million that they will realize is not sufficient to solve all the challenges besieging the group. Back in 2010, the company disclosed that it would come to the market to raise approximately US$50 million.
Three years down the line they are planning to raise less than half of that amount. This is barring the obvious fact that the company’s financial needs have grown significantly over the years.
Excluding Seed Co, the remaining two subsidiaries have a combined debt position of US$79,10 million hence the US$20,4 million that they will realize will not be much of a game changer. In addition to the US$79,10 million, working capital requirements need to be met. Thus the transaction may not see a reduction in the interest bill which stood at US$18,7 million in the full year to March 2013 for the two units.
Of the three Aico subsidiaries, Seedco is the only one operating profitably as evidenced by a profit before tax of US$12,4 million, Cottco lost US$7,6 million and Olivine had a loss of US$2 million. We believe that the best solution for the company would have been to sell out of Olivine and Cottco and use the proceeds to strengthen the seed business. The placement with Vilmorin & Cie will still have had to have been done to strengthen the company’s production capacities.
Such a move would have cleaned Seed Co’s balance sheet and also provided necessary funding for both capex and working capital. As it stands rescuing Aico as a whole is probably a little bit too late. The US$20,4 million is unlikely to yield the necessary positive results as operations for Olivine and Cottco are not likely to improve.'