Wednesday, October 24, 2007

1% of Australia for sale: Australian Agricultural Co.

I have a long standing interest in the Australian Agricultural Company (AACo) both as a very small investor and as someone interested in the Australian agricultural sector and its history. AACo is Australia’s second-oldest company – it was founded in 1824 - and our biggest beef producer by a ‘country kilometre’. It runs 630,000 cattle on 8 million hectares – that is about 1% of the Australian landmass. Most of the land is in the north of Australia where rainfall is good. AACo is a great asset.

Elders bought AACo and Elders itself became majority owned by Futuris in 1996. Futuris then floated the AACo in 2002 retaining a 43% stake. Yesterday Futuris put the stake on the market on the grounds that it was an expensive holding and that the share-market was not appropriately capitalising Futuris on the basis of its valuable stake.

As a shareholder I could hardly complain because the share price rose strongly to $2-80 but from an external vantage point I am troubled by this move and the evident lack of patience by Futuris. It seems to me to be a repeated pattern in Australian equity markets that local investors are excessively myopic in their pursuit of gains. The most plausible outcome in this case is that a multi-national from the US, Asia or one of the local groups of smarties like Macquarie Bank will find AACo an easy takeover prospect by swallowing the Futuris holding at a hefty discount to its long-term value. I can’t help thinking of the disgraceful sales of MIM to Xstrata and the initial opportunistic bids for Coles. WMC was sold for an absolute song to BHP-Billiton to the long-term disadvantage of its shareholders.

The drought has perversely depressed cattle prices and consequently the share price of AACo so now does not seem a good time to sell. Returns are low even though the vast scale of AACo makes it relatively drought-proof even though long-term prospects given surging food demands in Asia are excellent.

I’d prefer to hang on as a small investor and hold out for better times that to accept miniscule capital gains now. I'd certainly like to see AACo remain in the hands of those with experience in agriculture rather than being controlled by a bunch of myopic sharpies from Macquarie Bank.


Anonymous said...

Hi Harry
As a Futuris shareholder, my view is slightly different from yours! Futuris has held its share of AACo for 5 years since the float, so it really is more of a medium term investment than a short term one.

As a Futuris shareholder, aren't my best interests served if Futuris undertakes actions to unlock shareholder value in non-performing assets?

I agree that this particular point in time hardly seems appropriate for Futuris to be selling its stake in AACo. But perhaps they have been waiting a few years for the right time but it just hasn't come along?

I also agree it would be a shame to see an icon like AACo vanish, should MacBank or a foreign bank take it over. However the economy works best when decisions are rational, not emotional.


hc said...

Justin, I bought AAC at about 70 cents-$1 so I guess they have performed well. I assume that Futuris effectively paid $1. I think they have been not a bad investment.

I think Futuris is myopic in selling now. These assets will be enormously valuable a decade or so down the track. Asian diets will become more westerised and Australia is in the box seat to serve these customers. Climate change will further augment the value of AAC's assets - and deplete those of countries like China.

Its not emotion - I don't like to see great Australian assets flogged off at bargain basement prices. It costs me and will cost Futuris shareholders.