AGT Food and Ingredients management tables buyout proposal

[ourkid8]

https://www.bnnbloomberg.ca/agt-food-and-ingredients-management-tables-buyout-proposal-1.1114604

 

The head of AGT Food and Ingredients is leading a push to privatize the company.

 

Murad Al-Katib and members of his management team have tabled a proposal to buy out shareholders at $18 per share, a 37 per cent premium to the July 25 closing price, AGT announced on Thursday.

 

Under the terms of the proposal, Prem Watsa’s Fairfax Financial and Point North Capital, two of the company’s prominent investors, would retain their equity stakes if the privatization is successful. The management group, which collectively owns 17 per cent of the float, said Fairfax is willing to provide financing support for the transaction.

 

AGT Food and Ingredients’ board has agreed to form an independent committee to consider the proposal.

 

Shares of AGT have been under severe pressure this year, shedding half of their value amid persistent weakness in global pulse prices.

[wondering]

I have been slowly buying this stock over the past few months, averaging down as the price has decreased.  Yesterday, the stock really dropped big time.  I delayed purchasing more until today.  I missed a big opportunity for some easy money.  Oh well, at least I made a little money this one.

 

My original reason for buying this stock was,

 

- stable and but growing demand for product (pulses and lentils)

- weakening Canadian dollar with a large amount of international sales

- easy to understand business (although commodity business - one drawback)

- nice dividend (3.5% - 4% yield)

- Fairfax backing

[petec]

Interesting. Do you have a view on the ROIC it can produce?

[wondering]

Take what I write with a grain of salt.  I could be off in my calculations. 

 

For ROIC, I used the formula of (EBITA X (1- tax rate)/(shareholder equity + interest bearing debt)

 

For the past four years, I calculated (2017 - 6%, 2016 - 10%, 2015 - 10%, 2014 - 10%).  Average 9%.

 

From my quick reading of the company MD&A, and other websites, there appears to be a glut in lentils at the moment.  According to Ycharts website, the price was at a high of 42.70 in May 2016.  It is now currently 22.10.

[Spos]

I had looked at this before the big drop in the share price.  Never liked the leverage and the capital allocation (too many acquisitions, too high of a dividend).  The core lentils processing business seems good but there was way too much debt during the good times for a cyclical business like this.  Once the downturn hit, they were in a very tough spot.  They got very lucky with the financing they got from Fairfax last year, but even with that, they we were going to breach covenants.  Fairfax was always going to move to protect its investment, so the risk for shareholders was that the business does not turn around quickly enough and the company taken out at a low price or needs to go get more dilutive financing.

 

I feel there is one more year of tough conditions for the lentils business.  Prices are low so I think lentils seeding was low this year.  Given that, I think $18 is a good price.

 

 

[bizaro86]

Does anyone think a raise is likely here? I would have thought the premium is enough to keep minorities happy, although I suppose $18 is well off the 52 week high here.

 

I doubt Prem/management will feel like they need to raise, and I can't see another bidder coming in. I'm puzzled why the market is bidding this up past the purchase price...

[petec]

I had looked at this before the big drop in the share price.  Never liked the leverage and the capital allocation (too many acquisitions, too high of a dividend).  The core lentils processing business seems good but there was way too much debt during the good times for a cyclical business like this.  Once the downturn hit, they were in a very tough spot.  They got very lucky with the financing they got from Fairfax last year, but even with that, they we were going to breach covenants.  Fairfax was always going to move to protect its investment, so the risk for shareholders was that the business does not turn around quickly enough and the company taken out at a low price or needs to go get more dilutive financing.

 

I feel there is one more year of tough conditions for the lentils business.  Prices are low so I think lentils seeding was low this year.  Given that, I think $18 is a good price.

 

Interesting. I do feel like Fairfax have got themselves into a position where they get advantageous deal terms. Buying the equity here would have been a nightmare but a long term pref, combined with warrants, combined (as it turns out) with financing an MBO gives 3 ways to profit from the same cash flow stream, with nice upside/downside skew.

 

Has anyone seen anything on the terms of the financing for the MBO? I'm guessing Fairfax will have structured it well and to their benefit.

[Spos]

"Has anyone seen anything on the terms of the financing for the MBO? I'm guessing Fairfax will have structured it well and to their benefit."

 

I've only seen the press release which does not give the terms.  But I am not sure what happens to the warrants in a privatization given that the strike price is $33.75.  If Fairfax gives up on the possibility of the share price ever going back to the strike price, would they not ask for very onerous terms on the financing of the MBO?  But then why would management accept those terms?  Is it because the company is near bankruptcy?  Or is Fairfax thinking of an eventual return of AGT to public markets (and is that why PointNorth is going along as well)?  Not sure about any of this, but the press release felt a little light on detail, although it is a non-binding offer.

[petec]

I would imagine there’s a method for valuing the shares built into the agreement, and if the shares get to the strike price according to that method, the warrants become exercisable.

[tripleoptician]

Anyone been looking at this arbitrage opportunity.

 

Just had Independent Board Approval for $18 CAD 100% buyout transaction in early December. Awaiting shareholder vote.

Currently trades at 17.25

 

Buyout team = Management owns 17%

Fairfax/Point North own 10.5%

Fairfax warrants dilute another ~20% but exercise at $33.25 and non-voting.

 

Largest other shareholder at 18.6% plans to vote no.

https://www.just-food.com/news/biggest-agt-food-and-ingredients-investor-opposes-management-buy-out_id139748.aspx

 

Given where this trades currently it gives a 4.3% yield if transaction goes forward.

Vote should be early 2019 although date not announced. This would have a reasonable IRR if it closes within 6 months or so.

https://theprovince.com/news/local-news/agt-shareholders-expected-to-vote-on-privatization-deal-next-year/wcm/705b27c3-d735-49f7-92f0-52dc2d98611a

 

 

 

If it doesn't get approval it feels like Fairfax/Management might increase offer given where this was valued when they took initial stake on the warrants.

I think I'll be buying if it dips below $16 again

 

 

[Cardboard]

That 18.6% single vote is a major road block to this deal.

 

When you look at these transactions, you often see only 50-70% of votes being cast.

 

Assuming 60% of shares being voted, that is 31% against and they only need 33 1/3% to block the deal.

 

It could be higher this time around since there are 46.1% of shares outstanding between 3 groups that will definitely vote but, even using 70%, you still have a guaranteed 26.6% opposition.

 

Then most retail who vote in these things or are fervent tend to be opposed.

 

So it is not looking good to go through IMO. You could be on to something with a slightly raised bid.

 

Cardboard

[bizaro86]

Should be a majority of the disinterested shareholders requirement as well shouldn't there?

[tripleoptician]

That 18.6% single vote is a major road block to this deal.

 

When you look at these transactions, you often see only 50-70% of votes being cast.

 

Assuming 60% of shares being voted, that is 31% against and they only need 33 1/3% to block the deal.

 

It could be higher this time around since there are 46.1% of shares outstanding between 3 groups that will definitely vote but, even using 70%, you still have a guaranteed 26.6% opposition.

 

Then most retail who vote in these things or are fervent tend to be opposed.

 

So it is not looking good to go through IMO. You could be on to something with a slightly raised bid.

 

Cardboard

 

Thanks for that perspective. It was helpful