Jenny Ruth: Acquisitive Seeka arrives in the big league

Another of the companies trading on the Alternative Exchange is about to join the main board when its current capital raising closes tomorrow, following a flurry of acquisitions that has more than doubled its assets.

Seeka Kiwifruit Industries bought the Eleos kiwifruit processing business last year for $10.68 million, $1.78 million of that paid in shares. It bought the Bridgecool processing business, effective April 1, for $10 million and it also paid $3.7 million for a 20 per cent stake in another processing business, Opotiki Packing and Coolstorage (Opac) in January.

That has pushed its total assets from $46.8 million at the end of March 2004 to a projected $98.6 million at March 31 next year.

These acquisitions mean that the number of trays of kiwifruit Seeka packs will jump from 12.1 million in the year ended last March to 19.9 million in the current year, a 64.8 per cent increase.

Since the packing season ends in June and the prospectus for the rights issue is dated June 23, you'd have to expect the prospectus projection is pretty accurate.

The company is no stranger to acquisitions and large step-ups in production as it has led consolidation of the industry and is now the biggest player. Its last major acquisition was of the Waimapu processing business in 2002 and production has more than tripled from the 6.1 million trays it processed in 2001.

But these are larger chunks than it is used to biting off.

Tony de Farias, the managing director since 1992, says the Opac purchase is a strategic investment so there aren't any integration issues, although the two companies may look at integrating their information and financial systems.

And the Eleos business is based in Te Puke, where Seeka already has several packhouses.

De Farias says a major attraction of that business was its spare capacity. There will be no major relocations and, to the growers who supply the business, it will be business as usual.

"The integration of that into Seeka will be quite simple. It's all in Te Puke and, whereas the volume might be large, in that sense it's not a significant issue."

Integrating the Tauranga-based Bridgecool business, which is supplied by growers from Tauranga to South Auckland, will be more challenging, de Farias says.

While the company's bottom line is projected to grow just 10.3 per cent to $3.36 million in the current year, earnings before interest, tax, depreciation and amortisation (Ebitda) is expected to jump 76.6 per cent to $13.2 million.

De Farias explains that the bottom line is dragged down by the $500,000 issue costs as well as $404,000 in interest costs on bridging finance the company used to complete the acquisitions and which will be repaid from the proceeds of the capital raising.

That looks like it will be a success, with the company getting most of the $14.12 million it sought. Up to $1.95 million in shares offered to growers closed this month between 90 and 95 per cent subscribed, de Farias says.

Trading in rights to up to $8.67 million of shares at $4 each, which wasn't underwritten, closed on Wednesday at 22c, suggesting the take-up should be high. Seeka shares were trading at $4.26 yesterday. De Farias says less than 5 per cent of the rights were traded.

But the prospectus projections don't include any rationalisation benefits.

De Farias explains that the kiwifruit packing season runs from March to June and the company didn't want to disrupt production in the season just finished so the three businesses were run as stand-alones. Any efficiency gains the company can get won't show up until the year ending March 2007.

The company did have issues with its Waimapu acquisition in 2002 which, along with packing inefficiencies and poor prices for kiwifruit, dragged Ebitda down from $6.36 million in the year ended 2002 to $5.64 million the following year.

De Farias says the 2001 season, reflected in the 2002 result, was exceptionally good, so the 2003 result was down from a high base. And the Waimapu business had some lease arrangements with growers that weren't profitable, which meant some restructuring costs.

Looking further out, the company's earnings look set to be boosted from kiwifruit plantings it has been nurturing since 2000. Seeka estimates it will harvest between 700,000 and 1.2 million trays of fruit in the year ending March 2008.

It expects to earn between $4 and $5 a tray for 30ha planted with green kiwifruit and between $4.75 and $6.25 a tray from 76ha of the gold variety.

This operation is distinct from Seeka's orchard management and sharecropping arrangements, which, while they produce variable earnings depending on international markets, the weather and the New Zealand dollar, give the packhouse operations some security of supply.

Another growth opportunity, and a way to increase capacity without investing further in New Zealand-based facilities that are only used a few months a year, is through Opac's relationship with one of Italy's largest kiwifruit post-harvest companies, Salvi.

Italy produces 29 per cent of the world's kiwifruit supply, compared with New Zealand's 21 per cent.

De Farias says Seeka hopes to "piggyback" on Opac's five-year joint venture with Salvi and to ship kiwifruit in bulk to Salvi's packhouses during the Northern Hemisphere spring and summer, when those facilities are idle. The possibility of Seeka taking over Opac is also very much on de Farias' agenda.

"We've made no secret of the fact that ultimately we would be quite happy if Opac became part of the group."

Opac must have given up on the idea that it would be the acquirer since part of the deal which saw Seeka buy 20 per cent of Opac included Opac distributing its 12.8 per cent stake in Seeka to its shareholders late last year.

De Farias says the string of acquisitions was played out over about nine months as part of a deliberate strategy to be involved in rationalising the industry. Seeka had identified companies it was interested in acquiring and began negotiating with them.

"We looked for companies that were the best fit for the company rather than trying to mop up organisations that weren't particularly attractive."

The Bridgecool acquisition also brought with it avocado processing facilities. Avocados, harvested between July and December, are the Bay of Plenty's second-largest horticultural crop - producing 1.9 million trays today, with plantings for 7 million trays.

* Company profile

Head office: Te Puke

Profile: Seeka is New Zealand's largest kiwifruit processor. It also manages kiwifruit orchards, either for a fee or under sharecropping arrangements, and has its own planting on land leased for up to 20 years.

Market capitalisation: $46.2 million (not including the capital raising proceeds).

Latest results: Net profit in the year ended March was $3.04 million, down from $3.09 million the previous year, reflecting $450,000 in costs relating to the company's acquisitions.