“The current level of risk relating to (WSI’s) main business drivers remains at a level which is historically high and is unlikely to reduce in the short to medium term,’’ Northington Partners said in their report to shareholders.
The business was exposed to a high level of uncertainty. “Prospects for growth are not strong.’’
Northington Partners valued WSI shares at between 38c and 47c a share. Australian company Lempriere is offering 45c a share for the wool trading and scouring business, and has pre-bid lock-up agreements with the holders of just over 75% of the shares.
This would give Lempriere effective control of WSI, which the report says is the largest buyer at most New Zealand wool auctions and the biggest exporter of wool.
About 3850 minority shareholders, mainly sheep farmers, will now decide if Lempriere can increase its holding to 90%, at which point it can compulsorily acquire the balance. Trading in WSI shares was typically very illiquid and recent activity was helped by takeover speculation, the report said.
The offer to shareholders was compelling. A strong market-based value for the company was achieved by a thorough process by the receivers for the two entities (Plum Duff and Woolpak) owning a combined 64% stake, in their efforts to sell those shares. Lempriere’s offer was selected from two other binding bids, including one from scour competitor Cavalier Wool Holdings.
WSI’s independent directors have recommended to minority shareholders they accept the offer and will accept it for the shares they own.
The offer is due to close about February 24 next year and this timing means it cannot be extended.
Northington Partners value WSI at between five times and 5.5 times the average earning multiple, based on EBITA (earnings before interest, tax, depreciation, and amortisation) figures over the last four financial years and the budgeted figure for the current year.
The four-year Ebitda average was $7.79 million and the 2013 budget figure is $8.78m – helped by the historically high international price of wool grease, a by-product of the scouring process and used in the manufacturing of lanolin. The budgeted price is now 65% higher than the four-year average.
Given the nature of the business and the “very high level’’ of historical earnings volatility, it was difficult to reliably assess an appropriate level of maintainable earnings, the report said. It concluded that a range of between $7m and $7.5m appropriate. The earnings multiple figure was based on past industry deals, some involving WSI.
Projected sales turnover this year ($138.7m) would be lower than in the last two years, because of dramatically lower wool prices, but would be broadly consistent with longer term averages.
Working out the per share value, the independent appraisers took into account only the company’s core borrowings. Discounted bank bills used to finance trading operations were excluded because the amounts were covered by committed receivables, and bank overdrafts used in working capital were excluded because WSI’s accounts showed that its net working capital position had always remained positive.
The report noted that the 2013 budget allowed for the shutdown of the Kaputone scour plant near Christchurch during the first few weeks of the trading year, for the installation of a new wastewater treatment process.
Lempriere’s offer is conditional on an environmental engineer’s report stating that the plant is operating to required standards and wastewater discharge is at less than a certain level. Tests to confirm this were due to conducted over the course of the next week, WSI’s directors said in their report to shareholders.
Overseas Investment Office approval for the acquisition is also required.
The Northington report noted that the 150-year-old Lempriere business in Australia had become one of the world’s biggest wool merchants and processors.
The report said the receivers for Plum Duff and Woolpak eventually chose the Lempriere offer over the Cavalier Wool proposal to buy WSI assets because the latter would have taken considerable time to implement, included a possible downward price adjustment, and there were issues, including tax, over how funds would be returned to WSI shareholders.
