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  All along, Viterra was sowing seeds of takeover interest

BENJ GALLANDER and BEN STADELMANN

Friday, March 16, 2012

Viterra has certainly received its share of attention this week. Though no offer has been made public yet, a veritable Who's Who of global agribusiness giants has been mentioned as potential bidders for the Regina-based grain handler.

The atmosphere was very different back in November 2005 when this enterprise was added to the Contra the Heard portfolio at $5.67 a share. We knew the company well; we had previously bought and sold it for a gain of better than 60 percent during a volatile two-month period.

Back then, it was still the Saskatchewan Wheat Pool, but by that point CEO Mayo Schmidt had already diverted the corporation far from its prairie roots. Once the prototypical vertically-integrated conglomerate catering to the full spectrum of grain farming needs, Schmidt presided over a profound restructuring of the business.

After mounting losses, 25 subsidiaries were sold off, new capital was raised that was highly dilutive to the long-standing shareholders and the stock went through a 20-for-1 consolidation. It was about as much fun as a severe hailstorm in July.

The contrarian appeal was that SWP was still a dominant market player, the debt burden had been dramatically reduced, and cash flow was strong. We could also see that the replacement of the iconic village grain elevator with larger, more centralized facilities was resulting in efficiencies that would add lustre to the bottom line.

What we did not anticipate was that Schmidt would prove to be such an ambitious empire builder, bent on replacing the Pool's previous vertical approach with a horizontal expansion of far-reaching scope. The first big move was a messy takeover battle with James Richardson for Agricore. What started out as an offer worth about $1 billion ballooned into a $1.8 billion deal that showed that Schmidt was willing to go to extraordinary lengths to come out on top.

With the corporate moniker changed to the sexier-sounding Viterra, Schmidt continued make acquisitions ranging from pasta to lentils. These incremental moves were dwarfed by the next big jump, the takeover of Australia's ABB Grain, in 2009 for $1.4 billion. This not only provided an excellent gateway to Asian markets, but with large operations in a different hemisphere, it also mitigated Viterra's dependence on favourable weather in the Canadian west.

We had some misgivings about the enormous amounts of debt the company took on to make these purchases, but with steadily high prices for grains, few appeared to care. Fifty-five percent of our position was sold at $13.45, and we hoped the bandwagon for agri-stocks might carry it a bit further. Instead, the stock price has lagged. Quarterly results have generally been decent, but somewhat lumpy. It is evident that it takes time to digest new operations.

With the large predators now circling to take out Viterra, it is tempting to bring out the "hunter becoming the hunted" metaphor, but that seems to miss the mark. Instead, Schmidt has studiously cobbled together a company with all of the components needed to attract precisely this sort of interest. It is no accident that Schmidt's employment contract stipulates a change-of-control provision with a fabulous golden parachute.

What about the political resistance to a takeover? Despite the frequent comparisons to the blocked BHP Billiton bid for Potash Corp., there is little in common here. Saskatchewan Premier Brad Wall was quick to assure that he does not consider Viterra to be of strategic importance.

And rather than the pussyfooting required by a minority government, a Stephen Harper majority won't fret about opposition, if he wishes to maintain his reputation as the free-market guy. Rolling back the Canadian Wheat Board's monopoly was specifically part of the Conservative agenda in the last election; it is the implementation of this policy that was the catalyst for bringing the foreigners calling.

The bottom line is that the bucolic view of traditional wheat farming is over. It's been replaced by a guy planting his field with genetically modified seed, driving a GPS-guided 400-horsepower tractor, all while checking his derivative contracts with his smartphone.

The consolidation of the marketing of grains into the hands of a few powerful multinational entities is part of this futuristic vision for agriculture. Many farmers and consumers may begrudge such an outcome, but you can be sure that Mayo Schmidt will do his utmost to ensure a fine payday for shareholders, and himself.

Given that, and the potential for a bidding war, we are happy to hold our position and hope to pile additional gains onto our current return of over 180 percent.


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