Blockbuster deal

by Meyer Sosland
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The takeover of Agricore United by its rival Saskatchewan Wheat Pool in June has not only given Western Canada a grain company with enough muscle to hold its own in the international arena, it has also positioned privately owned James Richardson International as the country’s second-largest grain handler.

The recent series of events that has transformed the Canadian grain industry began on Oct. 24, 2006, when Saskatchewan Wheat Pool (SWP) presented an unsolicited merger offer to Agricore United Chairman and Chief Executive Officer Brian Hayward, which was flatly rejected. Instead, Agricore turned to a potential white knight, James Richardson International (JRI), a grain handling and agribusiness firm operating under the "Pioneer" brand in Western Canada.

JRI offered C$19.25 (U.S.$17.87) per common share and C$24 per convertible preferred share for Agricore, which was accepted by Agricore’s directors and shareholders. At the time, the new firm, which was to be named Richardson Agricore Limited, was heralded as "a true Canadian Champion." Not to be outdone, SWP President Mayo Schmidt returned to the fray in early May with an even better, all-cash offer of C$20.50 per common share and C$24 per convertible preferred share. Faced with an offer valued at roughly C$1.8 billion, Agricore United chose to terminate the acquisition agreement with JRI.

JRI GAINS MARKET SHARE
As a break fee, JRI and the Ontario Teachers Pension Fund, the company’s financial backer for the deal, received C$35 million and an agreement to acquire selected Agricore grain handling and crop input assets. Of the 24 assets acquired, 15 were grain handling facilities located primarily in Manitoba and Alberta, and the balance were standalone farm service outlets. Also, a grain throughput agreement was received for ship loading at Vancouver-based Cascadia Terminal and a fertilizer supply agreement was received with Western Cooperative Fertilizer Limited.

In order to satisfy the requirements of Canada’s Competition Bureau, U.S.-based Cargill Ltd. was also offered nine Agricore United elevators in the three Prairie Provinces.

For JRI, being trumped by SWP was a bitter-sweet experience. However, President Curt Vossen told World Grain the expanded grain company is now better prepared to gain market share on the Prairies.

"The key issue in the whole transaction for us was the assets," Vossen said. "These filled some very clear gaps for us in our collection system across Western Canada."

He said the additional assets will make JRI a "more comprehensive" competitor in terms of availability and location, with a stronger presence in Alberta and Manitoba, where the company previously had less presence in the marketplace.

"The market share from those assets clearly puts us as the number two player," Vossen said. "I would estimate that Saskpool would have around 42 percent market share when the smoke clears, and we will have about 25 percent. Cargill, with its acquisition of assets, will have around 14 to 15 percent."

TAKEOVER NOT SURPRISING
The consolidation of two of Western Canada’s largest grain firms did not come as a surprise to most industry observers. It had been evident for several decades that the Prairie grain handling and transportation system was badly overbuilt, with too many players in the marketplace.

In the early 1970s, the first indications that massive changes were coming to the Prairie grain gathering and transportation infrastructure appeared with the construction of large farmerowned "inland terminals" at Weyburn, Saskatchewan and a Cargill terminal at Elm Creek, Manitoba.

These were changes that the Prairie pools, particularly SWP, fought against with all the strength they could muster.

But there were other signs of change on the horizon: the growing pressure to "Kill The Crow" (the Crows Nest Pass Freight Rate that provided farmers with an extremely low, legislated rate for moving grain); the increased presence of U.S. grain companies such as Cargill; a move away from large state-to-state wheat sales; and the adoption of specialty crops such as canola, lentils and pulse crops on the Prairies.

However, satisfied with their dominance in Western Canada’s grain business, the grain cooperatives chose not to make the necessary changes in their core businesses and continued to operate with thousands of small, aging grain elevators.

When they finally did move to build larger terminals, they chose to compete against one another rather than cooperate.

Faced with ever-increasing competition and massive debt loads, the farmer-owned cooperatives were gradually forced to consolidate. These consolidations included the merger of Manitoba

Pool Elevators and Alberta Wheat Pool to form Agricore, followed by the merger of United Grain Growers with Agricore to form Agricore United

Burdened with a growing debt load, SWP struggled to shed itself of hundreds of small elevators, a grain terminal in Poland, Robin’s Foods, XCAN Grain, Premium Brands and Heartland Livestock.

It also dismissed its president, Don Loewen, and hired Mayo Schmidt, from the U.S., as its new leader.

With C$1 billion in debt threatening to push SWP into bankruptcy, the shakeup continued under Schmidt. The farm newspaper, The Western Producer, was sold, livestock operations were sold or shut down, the oilseed crushing plant

CSP Foods was sold, feed mills were sold and CanAmera Foods was sold.

But most importantly, in March 2003 SWP underwent debt restructuring during which convertible notes were exchanged for shares in the company.

While SWP had no other choice, the move from a farmer-owned cooperative to a publicly traded company meant the demise of what was once Western Canada’s largest farmer-owned grain cooperative.

But Schmidt, who joined the pool in 2000 after building a reputation for restructuring businesses at ConAgra and General Mills, was not finished. He wanted Western Canada’s second-largest grain cooperative, Agricore United.

"There were two lines of thinking," Schmidt told World Grain. "One was that agriculture was entering a new era of optimism and that there were a number of events that were beginning to align. Some of those were the demand from China and India. Ethanol and biodiesel were also driving changes. These were long-term events, but there were also shortterm events that were crop events in different countries. For example, in Australia, there were several years of drought. In general, food and food resources were becoming much more important. The other was the fact that I saw the opportunity to improve our financial stability and flexibility by combining the two companies."

On Aug. 30, in a move made to better reflect the breadth of its business, SWP announced that it will now be known as Viterra (www.viterra.ca), a name that means "life from the land." WG

Based in Vancouver, British Columbia, Canada, Leo Quigley writes for a variety of national and international publications specializing in agriculture and transportation. He can be reached at Quigley@dccnet.com.

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