Benefits exist in Elders-PGG Wrightson tie up: Wilson analysts

The company is a full-service agricultural supplies and services business listed on the New Zealand Stock Exchange with a market value of about $NZ312m.

Analysts at Wilsons have highlighted the benefits of a buyout by Elders of New Zealand rival PGG Wrightson.

It comes after Elders this week announced it had acquired an 11.3 per cent strategic interest in PGG Wrightson in line with its global diversification strategy in trade handled by Macquarie Capital.

The interest was acquired by private sale at $NZ4.35 per PGG Wrightson share for a total investment of about $37.1m funded through existing debt facilities.

The company is a full-service agricultural supplies and services business listed on the New Zealand Stock Exchange with a market value of about $NZ312m.

While Elders said it did not currently intend to initiate a proposal to acquire control of PGG Wrightson, it was an interested acquirer in 2018.

At that time, PGG Wrightson sold its seeds business to DLF Seeds for $NZ421m, equating to about 11 times earnings before interest, tax, depreciation and amortisation.

It left PGG Wrightson as a pure-play rural supplies and services business.

“The New Zealand market presents obvious differences in product mix (such as less broadacre cropping and more dairy) and competition (Fonterra operates a farm supplies business),” the Wilsons analysts said.

“But the product and service offering is broadly similar to the Australian market.”

Wilsons says while the strategic rationale is attractive and there would likely be some synergies, such as procurement, backward integration and corporate costs, the current valuation differential may diminish the value accretion for Elders.

Elders is worth about 10.9 times its forecast annual net profit compared to PGG Wrightson, which is worth about 13.1 times.

Elders has moderate debt levels at about 0.9 times its earnings.

Wilsons says that this means it would likely need a significant amount of equity to part fund a potential acquisition.

But sources close to Elders say that the company could buy PGG Wrighton without tapping the market.