Sticking With Viterra Despite Debt 

09/02/2009 11:54 am EST


Benj Gallander

President, Contra the Heard

Canada's acquisitive agribusiness may have bitten off more than it can chew, but sellers should get better opportunities, write Benj Gallander and Ben Stadelmann in Contra the Heard.

Viterra (TSX: VT) can be considered as the house that Schmidt built. This ambitious CEO has always been forthright about his vision of expanding the company into a global player, even when it was formerly known as Saskatchewan Wheat Pool. With his focus firmly on the next ten years, Mr. Schmidt is banking on the demand for commodities to increase by 20%.

Having barely evaded bankruptcy less than five years ago, it seems almost cavalier the way history is being ignored. The current blockbuster acquisition of ABB Grain, the former Australian Barley Board, will add a lot of new debt to an already large figure. The silo was previously crammed with the takeover of Agricore United. Associated Proteins was bought this summer for roughly $64 million and was part of the reason why Viterra raised another $300 million from an offering of five-year notes at an 8.5% coupon rate—relatively rich considering we’re in a low-interest environment. Shareholders had already been diluted to the tune of $450 million in a new stock offering at $8 per share. One hopes that we can make it past the first frost without another of Mayo’s corporate actions.

Certainly, these transactions have the potential to be advantageous, if the company doesn’t drown in the debt first. The Associated Proteins deal strengthened Viterra’s position as the Canadian leader in canola exporting. Adding ABB will mean more accessibility to a highly desirable Asian market hungering for grain. Yet the claim of new synergies created will likely just cover the additional interest payments from the financing.

Another question is the upcoming harvest. Prairie wheat production is estimated to drop 20%, with total crop production down by 50%. Less product being shipped could crush Viterra’s revenues. The firm’s second-quarter results were only so-so, and the company lost $6.6 million in the first six months of the year.

As do many others, we find Viterra's long-term prospects to be compelling. It is no surprise that this company is a favourite among many large cap Canadian equity fund managers. Longer-term, as they profess, demand for food from developing countries should continue its rapid growth. We also think it is realistic that Mayo can eventually pull off his bold scheme to lead a global company. But in the here and now, our concerns aren't being alleviated.

So the question remains: in keeping with our commitment to preventing the shoe from dropping, how should we act with Viterra? The shares are trading near C$9, which is reasonable for an immediate exit point. [The shares closed at C$9.16 in Toronto Tuesday—Editor.] But historically, this stock does well towards year-end. Yet, if the crop numbers are indeed poor, the sell target likely won’t be retouched this annum and the stock could fall a distance. At this point in time, fate will be tempted.

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