Bloomberg News

Viterra Soaring on Bid Talk Still Offers 42% Discount

March 13, 2012

Grain railway cars sit near the Viterra Inc. grain terminal in Vancouver, British Columbia. Photographer: Lyle Stafford/Bloomberg

Grain railway cars sit near the Viterra Inc. grain terminal in Vancouver, British Columbia. Photographer: Lyle Stafford/Bloomberg

Viterra Inc. (VT) is offering potential acquirers the chance to capitalize on the end of a wheat and barley monopoly in western Canada at a discount of at least 42 percent to the grain handler’s sales.

Shares of Viterra, which said on March 9 it had received interest from third parties, surged 32 percent to C$14.45 ($14.56) through yesterday, valuing the Regina, Saskatchewan- based company at 0.46 times sales, according to data compiled by Bloomberg. With takeover estimates ranging from PI Financial Corp.’s C$14.40 a share to C$18.50 a share from Raymond James Financial Inc., buyers still wouldn’t be paying more than 0.58 times revenue, the data show.

Viterra, Canada’s biggest grain handler with 45 percent of the market, expects as much as a $50 million boost to pretax earnings in 2014 after the passage of a new law that will allow farmers in the west of the country to start selling wheat and barley to buyers other than the Canadian Wheat Board on Aug. 1. Even without the profit increase, an acquisition within the range of analysts’ estimates would value Viterra at less relative to projected 2013 net income than the median multiple in agriculture takeovers greater than $1 billion, the data show.

The deregulation “adds a lot of earnings power to the company,” Steven Hansen, a Vancouver-based analyst for Raymond James, said in a telephone interview. “A bid today could be very opportunistic in buying in advance of that earnings power. There is certainly a lot of strategic value in Viterra’s assets.”

Today’s Trading

Holly Gibney, a spokeswoman for Viterra, declined to comment beyond the company’s March 9 statement, which said it received “expressions of interest” from third parties and that there “can be no assurance that any agreement or transaction will result.”

“A further announcement will be made if appropriate,” the press release said.

Viterra shares climbed 1 percent to C$14.60 at 10:58 a.m. in Toronto today, the highest level since June 2008.

Glencore International Plc (GLEN), the largest publicly traded commodities supplier, has expressed an interest in acquiring Viterra, a person familiar with the situation said this week. Other companies may also be studying Viterra, said the person, who declined to be identified because the details haven’t been made public. Closely held grain distributor Cargill Inc. has also expressed interest, the Wall Street Journal reported March 11, citing people it didn’t identify.

A spokesman for Baar, Switzerland-based Glencore, and Lisa Clemens at Cargill, wouldn’t comment yesterday.

‘It’s a Rush’

“It clearly looks as though there is interest in Viterra probably from multiple parties,” Jason Zandberg, an analyst for PI Financial in Vancouver, said in a phone interview. “There’s some nice assets in play and it’s a rush to buy them.”

Before Viterra’s announcement, the shares had fallen 5.5 percent in the prior year. After the disclosure, the stock posted its steepest two-day climb in nine years and the biggest gain in the MSCI World Index (MXWO) of 1,611 stocks, data compiled by Bloomberg show. At yesterday’s close, the company had a market value of C$5.4 billion, up from C$4.1 billion on March 8.

Even after the stock increase, Viterra’s price-to-sales ratio of 0.46 yesterday was cheaper than 74 percent of North American agricultural product wholesalers and food manufacturers with market values over $1 billion, data compiled by Bloomberg show. The group traded at an average of 1.02 times revenue.

Viterra, which changed its name from Saskatchewan Wheat Pool in 2007 after acquiring larger rival Agricore United, delivers grain to food manufacturers, sells fertilizer and seeds to farmers, and processes canola and oat for foods such as cereal and breakfast bars.

Demand for Food

Acquirers are taking interest in Viterra as growing populations in emerging markets and increasingly rich consumers drive food demand. The United Nations Food and Agriculture Organization has said that food output must rise 70 percent by 2050 to feed a world population expected to grow to more than 9 billion from about 7 billion now.

Raymond James’ Hansen says an acquisition of Viterra may command as much as C$18.50 a share, or 28 percent more than yesterday’s close. At that price, a buyer would be paying 0.58 times the company’s C$11.8 billion in sales last year, data compiled by Bloomberg show. An acquirer would also assume more than C$900 million in net debt.

Kenneth Zaslow, an analyst at BMO Capital Markets in New York, said in a report yesterday that Viterra could fetch C$14.50 to C$17.50 a share, while Zandberg of PI Financial pegs it at a minimum of C$14.40 a share. Zandberg’s estimated price would value Viterra at less than yesterday’s close.

Canadian Regulatory Review

Viterra shareholder Aston Hill Financial Inc., which oversees C$5.5 billion in client assets, would want a buyer to pay at least C$16 a share, said Andrew L.B. Hamlin, a Toronto- based money manager for the firm.

Foreign suitors trying to acquire Viterra may have difficulty obtaining approval from Canadian regulators, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon Plc.

The Canadian government rejected Melbourne-based BHP Billiton Ltd. (BHP)’s $40 billion hostile bid for Saskatoon, Saskatchewan-based Potash Corp. of Saskatchewan in November 2010 after the province said the sale would cut jobs and tax revenue.

Saskatchewan Premier Brad Wall said yesterday that while Viterra isn’t a “strategic resource” for the Canadian province like Potash Corp., his government will review any takeover bid to make sure a sale benefits the province.

‘Net Benefit’

Saskatchewan will give input into any federal government review of a takeover to ensure the transaction is of “net benefit,” Wall told reporters yesterday, according to a recording provided by his office. The federal industry department reviews foreign acquisitions of companies with assets valued at more than C$330 million under the Investment Canada Act to determine if they are a “net benefit” to the country.

“Ultimately I see the valuation as very compelling and there is an opportunity for a lot of parties to get involved as long as the Canadian government and politicians give the green light,” Tullett Prebon’s Shah said in a phone interview.

A takeover would give a buyer the largest share of the Canadian grain-handling market as the Canadian Wheat Board’s monopoly over wheat and barley grown in the west of the country ends. A law passed in December allows farmers in the nation’s main growing region to sell to any buyer of wheat and barley for delivery after Aug. 1, ending a system in place since 1943 under which farmers were required to sell through the board.

‘Gain Market Share’

“The dissolution of the Canadian Wheat Board all of a sudden now opens up this opportunity for international players as well as Viterra to now compete without the government controlling grain handling,” Hamlin said. “With the Canadian Wheat Board going away, other companies have the ability to gain market share.”

The deregulation may boost Viterra’s share of the market in western Canada from 45 percent to close to 50 percent in the next few years, Chief Executive Officer Mayo Schmidt said last week. The company said in a March 8 statement it expects the change to boost earnings before interest, taxes, depreciation and amortization by C$40 million to C$50 million a year starting in fiscal 2014.

Raymond James’ Hansen is estimating Viterra will make as much as C$30 million more Ebitda in 2014 than 2013 when he projects earnings of C$730 million. The 2014 estimate doesn’t account for potential growth in other business units, he said.

Relative Value

Even at the highest estimate of C$18.50 a share, a takeover would value Viterra at 22.7 times net income of C$303 million in 2013, based on analysts’ earnings estimates compiled by Bloomberg. Such a valuation would be less than the median of 27.4 times for agriculture takeovers of more than $1 billion, data compiled by Bloomberg show. That’s also before taking into account Viterra’s higher expected earnings from the monopoly dismantling, which would make a forward-looking net income multiple even lower.

The end of the Canadian Wheat Board’s monopoly “makes the whole market more attractive,” said PI Financial’s Zandberg. “And Viterra being the largest player in the grain origination business in Canada, it makes them a target.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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