Hart set for big spending spree

Rank Group will sell New Zealand Dairy Foods (NZDF) to Burns Philp.

Burns Philp - also majority owned by Rank - will merge NZDF with its baking, spreads and oils division.

The merged company - called Goodman Fielder - will be listed in New Zealand and Australia.

Graeme Hart's Burns Philp could have a $5 billion spending spree once the float of Goodman Fielder is completed, an Australian analyst says.

"The transactions effectively give Burns Philp up to A$4.5 billion ($4.91 billion) of acquisitive firepower," ABN Amro analyst David Cooke says in a report on the latest Hart deal.

That firepower reflects Burns Philp's ability to take on additional debt after the deal - which will see it spinning off and listing all but its snack foods division.

In its report on the deal, Macquarie Equities also says Burns Philp is likely to be sitting on a sizeable pile of cash after the listing.

"We estimate that [Burns] could hold between A$492 million and A$1.2 billion in cash post the IPO," the report says.

However, shareholders should not hold their breath for any kind of cash return.

"History would suggest that [Burns] will look for the next acquisition, and then leverage up, rather than return cash to shareholders."

Burns Philp chief executive Tom Degnan has already said he is now focused on looking for new acquisitions.

While a big Burns Philp acquisition may be imminent, Hart is not adverse to holding cash until the time is right to get a bargain.

Last year, Burns Philp cashed up $2.1 billion with the sale of its North American yeast business. That money is still to be reinvested.

Macquarie said Hart had proved adept at trading businesses and so "the market may back him to continue this form".

Analysts, such as ABN's Cooke, argue that Burns Philp is increasingly looking like an investment company rather than a traditional food company and should be valued that way.

That view would be further supported if it proves true that Burns Philp is lining up a trade buyer for it snack foods business.

Speculation has centred on a possible sale to Nestle or Arnotts.

The snack food business has a strong market position in the lucrative branded consumer product end of the food industry - something that makes it more desirable to potential buyers such as Nestle and Arnotts.

A Deutsche Bank report gives that business an enterprise value of A$1.2 billion (based on a multiple of 10 times earnings before interest, tax, depreciation and amortisation.)

Other analysts say it could be valued at up to $1.6 billion if the sale process is competitive.

Burns Philp will not be entirely cashed up in any event.

The company says it will maintain "a significant" stake in the new Goodman Fielder.

While it will not indicate the size of that stake, market consensus now seems to be that it will be in the 20 to 30 per cent range.

Some Australian analysts remain lukewarm on the prospects for the new Goodman Fielder.

Burns Philp shares closed at A$1.08 yesterday, down 2Ac.