Bid pre-empts market jitters

By PHILIPPA STEVENSON

Burns Philp's Tuesday market briefing has done much to allay concern over its daring move on Goodman Fielder before the formal filing of the bid today.

"Market concerns as to Burns Philp's ability to pay are, to a large degree, unfounded," ABN Amro investment adviser David Cooke told clients following the briefing by Burns Philp deputy chairman Graeme Hart and chief executive Tom Degnan.

The risk to Goodman Fielder shareholders appeared limited, despite their company being much larger than Burns Philp.

The bid conditions seemed the main area of market concern but they were negotiable.

"Understandably, the aim of the conditions is to ensure Graeme Hart does not experience deja vu," said Cooke, referring to Hart's 1998 raid on Burns Philp. That attempt courted disaster when the value of the company's spice business plummeted and the shares he had paid a premium for slumped to 5c.

The conditions on the Goodman Fielder bid were likely to be flexible and their aim was "to ensure no large black holes rather than worry about the letter of the law," he said.

Cooke believed the condition that Goodman Fielder's superannuation plan have no deficit was the biggest potential issue. Burns Philp was unlikely to "throw in the towel" at a A$10 million ($10.9 million) deficit, but would at A$50 million.

Jason Clark and Stuart Jackson at J. P. Morgan felt that other accounting conditions, including a 90 per cent minimum acceptance of the bid, were more worrisome, given the ability of Goodman Fielder's major shareholders to form a block.

ABN Amro was more relaxed about stringent accounting conditions and rated the risk of significant misstatement in Goodman Fielder's last three years' accounts as minimal.

Cooke said there was nothing to stop Goodman Fielder shareholders from realising A$1.85 a share "as a belated 2002 Christmas present".

J. P. Morgan said Burns Philp estimated the combined entity would have net debt of about $3 billion (A$2.7 billion), plus $247 million (A$225 million) of capital notes, which would be issued in New Zealand. The average cost of debt was expected to be about 7.75 per cent.

Burns Philp would be targeting a total debt to earnings before interest, tax, depreciation and amortisation (ebitda) multiple for the combined entity of 3.5 to 4 times ebitda in its third year.

This would put Burns Philp above international food companies such as Kraft (2.2x), Campbell Soup (2.7x), Kellogg (3.1x), and Conagra (3.6x) and below companies such as Del Monte (4.5x), General Mills (4.8x), and Premier International Foods (5x).

"We highlight that, given most of these companies are US-based, they would arguably have a lower cost of debt than Burns Philp. This is not captured in the debt/ebitda multiple," J. P. Morgan said.

"On our estimates, net interest cover (ebitda/net interest) will be only 2 to 2.5 times."

Burns Philp's strategy for Goodman Fielder was simply to improve returns, essentially by extracting cost savings. Cashflow generation would be used to reduce the heavy debt, and this would include adopting the Burns Philp policy of not paying dividends, the advisers said.

Goodman Fielder shares closed down 1Ac at A$1.79 on the Australian Stock Exchange. Burns Philp shares gained 0.5Ac to 48Ac.