Chinese bid for CSR Sugar isn’t sweet enough yet: Bartholomeusz

Bright Food Group’s unusual eleventh-hour attempt at a bear hug will annoy CSR directors, but also give them a sense of vindication.

For much of last year the directors and their advisers explored the potential for a trade sale of the group’s sugar and ethanol businesses, looking at both outright sales and the possibility of attracting a cornerstone shareholder for the demerger they ultimately opted for. International players in the industry, including China’s Bright Food, trouped through the CSR data room.

In the end, the board concluded that a clean demerger, after a $375 million capital raising that enabled the balance sheets of both the building materials and sugar entities to be sensibly recapitalised, was the preferred option (see CSR’s sugary play status, October 26, 2009).

If there were to be strategic activity around the sugar entity, to be rather awkwardly renamed Sucrogen, CSR shareholders would benefit from the clearer base valuation provided by a separately listed pure-play on sugar.

Now, however, with about six weeks to go before shareholders vote on the demerger, Bright Food has intervened. It did so, apparently, without giving CSR any prior warning of the announcement made this morning, despite previous contact between the two companies.

That would appear to be a tactic to put external pressure on the board to take seriously a proposal that Bright Food presumably believes would otherwise have been privately dismissed.

If so, the CSR response, which was very dismissive of “merely an expression of interest”, offered little encouragement that the rather naïve approach would provide anything much more than a distraction. CSR noted that, as with earlier discussions with Bright Food, the expression of interest lacked certainty as to value, timing and the likelihood of completion.

The Chinese food producer, distributor and retailer hasn’t actually made an offer, or committed to making one. It has offered to hold discussions with CSR to “develop a proposal” which could lead to it acquiring the sugar and biofuels businesses for “not more than” $1.5 billion. It can withdraw its “proposal” at any time.

The $1.5 billion figure is interesting. Back in June last year, when CSR announced it was pursuing the demerger, that was its own internal view of the value of the sugar and ethanol businesses. Since then, the sugar price has risen strongly, the profitability of the businesses has risen and equity markets, of course, are significantly higher.

It would be surprising if the directors believed that the value of the businesses wasn’t also significantly higher today than it was in June which, by definition, would mean the Bright Food proposal, capped at $1.5 billion, undervalues the businesses.

Sucrogen would be among the world’s lowest-cost producers and a business of international significance. It is well placed to benefit from the longer-term outlook for agribusinesses as emerging economies, like China and India, shift up the food curve.

Bright Food noted that an acquisition of the businesses would provide the sugar division with a channel directly into the growing Chinese sugar and food markets, where Bright Food has the biggest sugar distribution network. The potential of the Chinese market is, of course, something CSR shareholders might well want to retain an exposure to.

The difficulty for Bright Food is that, with the demerger so close, the CSR board was inevitably going to refuse to engage with such a woolly and ultra-conditional proposal and continue to press ahead with the de-merger meeting.

The board knows that, by making its approach public, Bright Food has underscored the strategic value of Sucrogen in a consolidating sector and, in the process, has put a floor under the new entity’s value.

With Bright Star noting that any acquisition would require Foreign Investment Review Board approval in Australia and various approvals in China – which it said could take three to four months to obtain – the CSR board would also be mindful of the risks of abandoning or deferring the demerger for a possible trade sale at such a late stage in the very protracted process.

If Bright Food is serious about acquiring the sugar and ethanol businesses, it will almost certainly need to put something more concrete and formal and binding on the table soon, particularly if it wants to force CSR to give its shareholders the choice between a trade sale and the demerger.

This article first appeared on Business Spectator.