Has Select Harvests gone nuts?
Just as we start to believe we have seen everything, all of a sudden a company takes us by surprise. Take the recent decisions by Select Harvests, for example.
Select Harvests (ASX: SHV) is a $370 million grower of almonds listed on ASX. The company has had a tough time recently with the share price falling from $13.50 in mid-2015 to just under $4 last week, thanks to a bad growing season in Australia and falling world almond prices as California’s drought ends and US supply expands.
Last week Select Harvests applied for a voluntary trading halt, and on Monday this week they made the following announcements:
- That on the 19th of September Select Harvests received a takeover offer from Mubadala (the sovereign wealth fund of Abu Dhabi) for $5.85/share or a 45 per cent premium to the $4.03 price that Select Harvests were trading at that day.
Importantly, Select Harvests also announced that they thought the price significantly undervalued the company and were not prepared to enter into further discussions, nor offer Mubadala an opportunity to conduct further due diligence.
While this may have been a surprise to shareholders, the following announcement may have surprised them even more:
- Select Harvests announced they had raised an additional $45 million in equity capital through an Institutional Placement at a price of $4.20/share.
An Institutional placement is basically a targeted issuance of shares to a select group of investors and although the announcement states that offer was made to existing investors, there might very well be existing shareholders that were not invited. Finally:
- A share purchase plan, with the aim to raise a further $20 million, at the same share price as the institutional placement, with smaller investors invited to acquire up to $15,000 in new shares.
Of course the share price reacted positively to the announcement that someone is interested in acquiring the business at a significant premium to the current share price so both the investors invited to participate in the placement and those participating in the share purchase plan will be better off than they were previously, but we would be asking the company a couple of questions:
- Why have you issued shares at a price 28 per cent lower than that which was offered a week earlier and which the company had said undervalued it.
- Is the company confident that there will be a significant improvement in underlying trading conditions and profitability?
- Does the company believe that Mubadala or another party will pay a higher price than $5.85/share (even though the theoretical value is now lower thanks to the new equity issued at a discount to the offer price)?
- When such large discounts are involved, does the placement treat existing shareholders fairly and equally?
Montgomery does not own any shares in Select Harvests but, IF we did, and were not approached to participate in the institutional placement, we would be mightily annoyed.
We wonder whether other shareholders feel the same, especially if a higher bid fails to emerge or continued tough trading conditions put more pressure on the company and its profits.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Rick
:
Is it possible that there could be some kind of other non-monetary benefit to the issuance? i.e., a strategic investor that can assist them with accessing other markets as part of the deal??
Scott W
:
Unlikely Rick as their crop is fully sold every year they don’ actually need access to new market or new customers. They are really a price taker, Almond price is key along with efficiencies from streamlining the business and economies from growing the overall business to make best use of the capital investment in their factories and processing facilities and their new waste to electricity power plant.
Scott W
:
SHV share price is historically a play on the global Almond price. Given the company has acquired a significant additional asset in another large Orchard this year as well as taking future steps on processing capacity and energy savings with a cogeneration plant that uses their waste to power the whole business once commissioned in this era of rampant power cost increases it’s a great move into the future. The banks want to see some debt reduction, but that is against productive asset acquisition, so the capital raising should be largely neutral in terms of company value if used to pay down debt used for the Orchard purchase.
If the Almond price is in terminal decline the value of the stock is going to tank. But as global demand is briskly increasing and SHV are a major global player their would likely be a bet by the company that their fortunes are turning up. The takeover offer is no doubt opportunistic, and the intended buyer is betting the Almond price will increase. You could assume that the company management know more about the trend of the commodity price than the punter in the market feeling annoyed they didn’t pick up a quick $dollar to sell out a major Australian company into foreign hands. If they went first to the existing believers in the company for the capital raising that’s likely good for stability as Agribusiness is a long term play hence super funds etc being significant holders of SHV. The Board and Management of any company should act in the interest of the shareholders and the company regardless of what the traders in the market might feel is in their best interest to take a quick profit. As Roger might say you shouldn’t buy a share unless you’d be willing to own the whole company.
Andreas Lundberg
:
Hi Scott,
No doubt that the share price of SHV is depressed due to weak almond prices and that the offer from Mubadala is opportunistic. The main point is though that the company choose to issue shares at such a big discount to the offer on the table and to do it in a way that could potentially disadvantage a sizeable portion of their current shareholder base. It would be a very different thing if they had raised money through a normal rights issue process where every shareholder would have the opportunity to participate in proportion to their existing shareholding as the discount would then not matter.
Scott W
:
You would have to suspect that with a foreign takeover being the offer on the table and the capital raising being at a higher price that the previously traded price, the managers wanted to keep the business locally owned and controlled. Given Almonds are the number one snack in the Middle East region where the takeover offer originated they are seeing an uptrend in pricing which is going to drive up the share price again. Agree that the shareholders who did not get access to a rights issue will be rightly annoyed if indeed they would have actually participated, but I suspect they might equally have tried to take the quick cash of the offer from the Middle East based takeover and would regret it later if the company remained public and in the mid term future the price is well above the offer price of recent times.
Colin Petersen
:
Spineless management issuing a blocking stake to a takeover to secure their own jobs.
Santos did the same thing a few years ago, turning down a takeover at a premium and almost immediately issuing a large placement as a discount.
Next AGM should be a lynching.