SHARES in poultry group Sovereign Food Investments perched close to a 12-month high on Thursday, after larger rival Country Bird Holdings tabled a buy-out offer at 900c/share.
At the close of trade Sovereign’s shares were up 16.55% to 838c — close to the 880c annual high recorded in October last year.
Country Bird already owns about 10% of Sovereign, and has pitched its premium priced buy-out offer at a difficult juncture for domestic poultry. Chicken producers face increased input costs after a prolonged drought, new brining regulations and an influx of imported chicken.
Sovereign said its directors would “in due course” constitute an independent board and independent experts to assess whether Country Bird’s offer was fair and reasonable.
The offer by Country Bird values Sovereign at about R685m — representing a premium of 25.4% and 21.9%, respectively to the pre-offer share price and the 30-day average price.
The offer also represents a premium of between 21.3% and 12.8% to the independently assessed fair value of between R7.42 a share and R7.98/share disclosed in Sovereign’s recent circular around its proposed empowerment deal.
But Sovereign’s most recent net asset value (NAV) was reflected as more than R10/share.
The success of Country Bird’s buyout offer will depend on the response by institutional shareholders, notably Prudential, Old Mutual and Sanlam, as well as investment company RECM & Calibre. These shareholders speak for about 55% of Sovereign, and have proved to be strong backers of efforts to bolster operating margins with value-added chicken products.
They are also supporting Sovereign’s much-criticised empowerment scheme, which will be voted on at a general meeting on July 28. One of the conditions precedent for Country Bird’s buy-out offer is that Sovereign abandon the proposed empowerment scheme. The scheme has attracted criticism from some quarters for not being broad-based and for allowing significant participation by senior executives at Sovereign.
Prudential, the largest shareholder in Sovereign, was not ready to comment on Country Bird’s offer. Prudential spokeswoman Lynn Bolin said the offer was still being evaluated.
Vunani Securities’ small-to mid-cap analyst, Anthony Clark, said major institutional shareholders now had to decide between accepting Sovereign’s partial share buyback associated with its flawed empowerment structure at 850c a share, or accepting a full buy-out offer at 900c a share.
Clark said Country Bird’s offer seemed clear-cut on a valuation basis. He noted that since October 2015, Sovereign had failed to implement a quasi-empowerment initiative aimed at entrenching bloated management and protecting the company from external takeover bids.
“With significant headwinds in the poultry sector … many have argued that sector consolidation is needed to enable better economies of scale and cost-cutting to allow the sector to compete and remain viable.”
Clark reckoned material costs could be cut from a combined Country Bird/ Sovereign operation.
Opportune Investments CEO Chris Logan, a Sovereign minority shareholder who has long been a proponent of corporate action in a vulnerable domestic poultry sector, welcomed Country Bird’s approach.
“From an emotional perspective, I am delighted that a white knight has emerged to save shareholders from the oppression they have suffered at the hands of the Sovereign board in their ongoing attempts to entrench their own control.
“From an analyst perspective, it’s a good offer, significantly above Sovereign’s own established fair value,” Logan said.
He stressed that Sovereign managed to achieve only a 10% return on equity at the top of the poultry cycle. Logan added that Sovereign had performed poorly, even if the contentious performance bonuses paid to Sovereign directors and management last year were added back.
“You are forced to agree with (rival poultry group) Astral CEO Chris Schutte that NAV means nothing when looking at Sovereign.”
Aeon Investment Management chief investment officer Asief Mohamed — also a shareholder in Sovereign — believed any offer from Country Bird should also contain a significant control premium.
Sovereign held some competitive advantages including paying a lower maize price, scant debt, and an increasing emphasis on a value-added product portfolio, which could enhance margins in the years ahead, he said.
Mohamed questioned the 900c/share offer in light of Country Bird’s stipulation that the buy-out price excluded future dividends. “We don’t know what dividend Sovereign might pay in the time it takes to conclude a deal with Country Bird.”
Mohamed also said that Country Bird had not indicated whether it would account for interest accruing on the offer price should efforts to conclude the deal, which needs competition authority approval, drag on.