A game of chess is underway in South Africa’s agricultural hinterland as players position themselves to dominate in SA’s agricultural sector.
JSE-listed African Rainbow Capital Investments (ARC) is one. It acquired a minority stake in Acorn Agri in 2017, an acquisitive investment holding firm with investments in Overberg Agri, Agpack, Montagu Dried Fruit and Lesotho Milling Co, and an eye on a JSE-listing.
In this effort, it is not ARC, but one of its portfolio companies that is coming head-to-head with Senwes, a 100-year-old former co-operative that dominates SA’s mielie heartland and earns R432 million in profit annually.
The companies are tussling for control of Upington-based agricultural co-op KLK Landbou, a smallish operation with interests in livestock trading, agricultural produce, building supplies, meat sales, hide tanning, and vehicle and fuel sales. Of particular interest might be its 50% stake in Carpe Diem Raisins, which exports about 10 000 tons of raisins – 22% of SA’s production – to foreign buyers annually.
Annual sales for the group top R2 billion and profits in 2018 were R46.3 million.
The battle was sparked some months ago when Subtropico, which is 25.1% owned by ARC, bid R17.50 a share for KLK to value the business at R300 million. Subtropico, which already owns a 30.6% stake in KLK, is a market agent, representing some 6 000 producers around the country and supplying produce to most of the city markets across the country. Its subsidiary Vleissentraal is one of the biggest livestock auctioneers around.
Incidentally, Piet Viljoen’s Re:CM owns 5% of KLK.
Not to be outdone, in December KLK ‘neighbour’, the Klerksdorp-based Senwes, entered the fray, bidding R18.50 a share for KLK, valuing the company at R318 million.
“Given its geographic locality, I would argue that Senwes sees KLK, with its retail and fuel footprint, as an ideal fit into its North West Province heartland,” says small-cap analyst Anthony Clark, who follows SA’s agricultural sector closely.
“Senwes, which in 2018 had R9.5 billion in revenue and profit before tax of R432 million, has an extensive range of operating activities and controls a quarter of SA’s commercial grain storage capacity. Getting together with its smaller neighbour seems a much better transactional fit.”
A combined circular, from KLK and Senwes, and detailing the Senwes offer will be posted to shareholders before the end of March. Until this process is complete group CEO Francois Strydom is reluctant to talk to the media.
Meanwhile, Subtropico revised its bid for KLK, raising it to R19 a share after a fair & reasonable statement by Ernst & Young valued the business at between R19 and R23.50 a share. “This represents a 21.8% premium on the share price of R15.60 as at 27 September 2018, which is the day before KLK made a cautionary announcement,” says Subtropico financial director Burger Botha.
He says that there are real synergy opportunities between KLK and Subtropico. In addition, he says, Subtropico and its partners have healthy balance sheets to fund future growth of KLK and its underlying businesses.
The Subtropico offers expires on 31 March.
No love lost
“The fact that the KLK board took on Subtropico via a fair & reasonable suggests there is no love lost between the parties,” says Clark. “KLK is a good fit with neighbouring Senwes. I don’t see much tension between those parties and (KLK) being part of a farmer-led business rather than a mere piece of a larger private equity type conglomerate may soothe board tensions on the bid.
The stakes are relatively high. If the Subtropico offer of R19 per share expires, Senwes is, according to its offer documentation, in a position to lower its offer to R15 per share.
While KLK is a smallish business, its geographic location and range of business interests make it enticing to the bigger entities in the sector.
“We are still in a period of consolidation and it seems likely that in the future four or five large companies will dominate the sector – you need a huge balance sheet to keep agriculture going,” says Clark.
The biggest players at the moment, he says, include Kaap Agri, Afgri, Senwes, TWK Agriculture and investment holding companies Zeder and Acorn.