Richard Inder

When Goodman Fielder was floated a little over three years ago it was promoted as a company that provided for investors in the same way as its products - bread, butter, milk and oil - provided for the nation. This was staple fare - a share for grannies.

The tagline on the prospectus for the $2.55 billion share float said it all: "Superior market positions supported by heritage brands - dividends and growth supported by a strong financial position."

Goodman Fielder projected growth in trading profits for the first two years of around 17%, a dividend yield of around 6-7% and imputation credits for New Zealand investors - a rare quality for a company that spanned the Tasman. And the company, in its first couple of years, delivered. Results and yields were robust. Sure, it was not exciting stuff, but it filled investors' tummies.

The last year has not been quite so bright. This is not because management has been doing an especially bad job. Instead it reflects the fact that recent economic conditions have thwarted Goodman Fielder at every turn. Goodman Fielder should be a defensive stock.

As a food manufacturer, it should be relatively insulated against the ebbs and flows of the economy. People might be able to put off buying a new car or a meal out, but they still need their (Meadowfresh) milk in the fridge and their (Molenberg) bread on the table. And when the economy roars away, the more highly-branded elements of its offerings such as luxury desserts or fresh cheeses might tempt shoppers.

However, few companies can withstand the volatility that has harried the market over the past year. This is especially the case for Goodman Fielder, whose fortunes are highly dependent on the trajectory of prices in the sector of the economy which has been subject to the most extreme swings in prices - bulk commodities.

In short, Goodman Fielder is proof positive that stability in prices is more important than the absolute level of those prices.

Prices for key ingredients, such as wheat for Goodman Fielder's baking operations and edible oils for its commercial and home ingredients businesses, soared to a peak around the middle of the year. The rise was linked to a belief that elevated oil prices would spur the planting of crops to produce bio-fuel, displacing food crops and thus elevating their prices.

Goodman Fielder's response to this surge was to lock in hedges at lower rates - believing commodities would be "stronger for longer." But as the turmoil in financial markets began to spill over into the real economy and commodity prices fell, Goodman found itself locked into hedges that prevented it from benefiting from the lower prices.

The firm last week warned commodity price hikes would lop $A100 million from its bottom line and it will not start to see the effects of lower prices until the second half of this financial year. The depth and the severity of the downturn have, ironically, unmasked a weakness in its strategy. Goodman Fielder's brands are supposed to be one of its greatest strengths.

Customer loyalty should allow it to pass on these costs. However, during this downturn, shoppers are leaving these in favour of the growing stable of supermarket house brands, depriving the business of one of the key levers to keep earnings on track.

One of the big questions now facing the company is whether the power of its brands in staple food categories has diminished.

As a result of these forces Goodman cut its earnings guidance saying it expected full-year net profits to be in the range of $A191 million and $A204 million, equating to a fall of 8% to 14% on last year's result.

However, it could be a lot worse. Management, led by former National Foods boss Peter Margin, has been working hard to contain these forces with cost cuts including 225 redundancies, rationalisation of its manufacturing sites and a refinement of its distribution channel.

At the same time it has been investing in new products initiatives. In New Zealand this initiative is represented by the development of a specialty cheese facility at its plant in Longburn in the Manawatu and upgrading the plant's yoghurt and liquid milk operation. In Christchurch it is developing a UHT milk facility from which Goodman Fielder will be able to service its emerging market opportunities, particularly in Asia.

Its balance sheet is also sound. As at June 2008 the firm has $384 million available in its banking facilities and net debt stands at around 65%, and interest cover at around 4.6 times.

Reflecting this strength, the firm has already refinanced well over half its long term borrowings at rates that represent a respectable spread over wholesale rates. It is also trying to increase its economies of scale with acquisitions including the River Mill Bakeries in Huntly, independent liquid milk producer Independent dairy producers, dip manufacturer Copperpot and the biscuit manufacturer Paradise Foods.
--
Richard Inder is an investment advisor at Macquarie Private Wealth. His disclosure statement is free and is available on request. His clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com

Graeme Hart is finishing off the year with a $3.5 billion play for packaging assets around the world.

His company Rank yesterday disclosed it was buying International Paper's drinks packaging division for $725 million and launching a takeover bid for listed Swiss packaging group SIG that values the firm's shares at $2.8 billion.

The bid puts Hart in the thick of a takeover battle. His offer trumps an earlier bid for SIG - by Norway's Elopak and private equity group CVC Capital Partners.

If he gets both assets they would link with the packaging business of Carter Holt Harvey - the former International Paper subsidiary he acquired at the start of this year for $3.3 billion - and will set the billionaire on his way to become a force in international packaging.

"Combined, the two businesses would have sales of $US2.75 billion ($4 billion), employ 7700 people and would offer a range of beverage and food packaging solutions from a global network capable of servicing regional and multinational customers," Rank said last night.  Carter Holt's packaging business has sales of about $600 million.

Before the announcement, SIG's shares in Switzerland were trading at 358 Swiss francs ($423.8), below Hart's bid of 370 franc but above the Elopak offer of 325 francs.

SIG manufactures cartons for food and drink products, as well as machinery and in 2005 it had sales of $2.7 billion. It employs more than 4700 people and is divided into two divisions - Combibloc and Beverages.

Rank said the acquisition of International Paper's beverage packaging arm was expected to close on January 31, subject to the receipt of regulatory approvals and other conditions.

It specialises in producing liquid paperboard packaging for fresh milk, dairy and juice. It includes a 700,000-tonne pulp and paper mill at Pine Bluff in Arkansas - similar in size to the Carter Holt Harvey Kinleith mill - as well as other facilities scattered across the US, Canada and Asia.  The business employs about 3000 people and produces more than 670,000 tonnes annually of packaging. The business had net sales of about $US859 million in 2005.

The deal caps off an epic year for the billionaire, that started with the privatisation of Carter Holt.

This month he completed the break-up of Burns Philp - the Australian food company which he bought into in 1997 - when he sold his Bluebird snack business to US food and drinks giant Pepsico for $245 million.  In May, Burns Philp's Uncle Toby brand was sold to Nestle for about $1.1 billion. That and the float of the Goodman Fielder business last year gave Burns Philp $2.9 billion, net of debt. Hart privatised Burns in November for $1.5 billion.

At the time analysts said he had enough equity to raise money for acquisitions worth more than $12 billion. That was not counting the unknown level of equity he has in Carter Holt Harvey.  He has since sold most of the group's forests to American firm Hancock for about $1.5 billion.

Hart is also understood to have looked at Australian packaging company Amcor. Market commentators say the frenzy of private equity in Australia has pushed prices higher than Hart is interested in paying.

BIG MONEY
* March: after paying more than $3.3 billion, Hart gains full control of Carter Holt Harvey.
* May: Burns Philp sells Uncle Toby's business to Nestle for $1.1 billion.
* August: Hart makes full takeover bid for Burns Philp.
* October: CHH buys nine ITM hardware stores. CHH sells forest assets for $1.5 billion.
* November: Hart gains full control of Burns Philp.
* December 7: Sells Bluebird for $245 million.
* December 19: Agrees to buy International Paper's drinks packaging business for $725 million and launches bid for Switzerland's SIG.

Billionaire Graeme Hart looks set to pocket as much as $240 million in gross profit selling the assets he bought in August from Fonterra.  Details of Hart's gain are disclosed in draft prospectus documents for the A$2.27 billion float of transtasman food giant Goodman Fielder, which is taking over the former Fonterra assets.

They show Hart is selling his New Zealand food operations for A$782.6 million ($850 million) to Burns Philp. Burns Philp, 54 per cent owned by Hart, will combine these assets with its baking, spreads and oils business to create Goodman Fielder, which will be floated on the New Zealand and Australian stock exchanges.

Based on an analysis of divisional earnings, the price is made up of around $654.5 million for the former Fonterra assets. Hart bought the assets for the equivalent $416 million at the end of August. The remainder of the $850 million is made up of Hart's own dairy operations including Puhoi cheese.

Before this latest deal Hart was worth $2 billion, according to the National Business Review's The Rich List. He will make much of the gain by cutting costs, which come at some expense.

The gain will represent a return of almost 60 per cent in just over three months and is certain to raise questions about Fonterra's deal-making skills and its management of the Meadow Fresh operations.

The deal will be the second time Hart has got the better of Fonterra. In 2002, it sold a half share in New Zealand Dairy Foods to Hart in a deal which valued the whole business at $310 million.

Fonterra in August bought back most of the assets, including the Anchor Milk and Fresh n' Fruity yoghurt brands, it had sold to Hart for the equivalent of $754 million. It paid with $338 million in cash and contributed the Meadow Fresh assets then valued at $416 million.

The Meadow Fresh assets are now being sold into the new Goodman Fielder.  Fonterra said it was comfortable with the latest transaction, which had been independently examined. It said the analysis did not take into the strategic benefits of the assets it gained.

Burns Philp yesterday declined to comment on why it was paying such a price for the businesses. But it understood its purchase will also be examined by an independent appraiser.

Goodman Fielder
* Chief executive Peter Margin.
* Brands: Molenberg, Vogel's, Ernest Adams, Edmonds, MeadowLea, Meadow Fresh, Tararua, Puhoi, Kiwi, Huttons.
* Due to float on the NZX and ASX by December with a minimum of A$1.6 billion offered to the public.
* Expected total share value A$2.27 billion.
* 2006 Sales A$2.46 billion; 2006 Operating Profit: A$355.6 million.

Graeme Hart's Burns Philp will give the New Zealand sharemarket a huge shot in the arm when it spins off its Goodman Fielder food business this year.

The Business Herald understands Burns Philp aims to offer investors an 80 per cent stake in the business, worth A$1.3 billion to A$1.9 billion ($1.4 billion to $2.07 billion). The exact value of the offering is dependent on demand for shares. The Kiwi billionaire controls Burns Philp through his private company Rank, which owns a 54 per cent stake.

New Zealand investors, including retail investors, are expected to buy $200 million to $300 million of the shares with the rest going to investors in Australia, the United States, the United Kingdom and Asia.

The company will have a market value of about A$1.6 billion to A$2.3 billion. This will place it in the benchmark ASX-200 and the NZX-50 indicies and ensure reasonably strong demand from large institutions for the shares.

It will have a dual primary listing in New Zealand and Australia. Timing of the float, which will give priority to existing Burns Philp shareholders and holders of the company's converting preference shares, is unclear although Burns Philp has said it was aiming for the latter part of this year.

The company is to be created from the merger of the dairy and cured meat assets Rank bought from dairy giant Fonterra last month and Burns Philp's baking, spreads and oils business. In the year to last June, the business would have had sales on a pro forma basis of A$2.3 billion and trading profits of A$360 million to A$380 million. But bankers selling the shares are expected to make much of the growth in earnings.

The company is expected to have around A$1 billion of debt, giving it an enterprise value of around A$2.9 billion on a conservative estimate of its market value.

Since similar businesses trade on an earnings multiple of around seven to eight times prospective trading profits, the company should turn in around as much as A$414 million next year.

Much of the earnings growth is expected to come from the brands Hart acquired from Fonterra, including the dairy brands Meadow Fresh, Naturalea, Tararua and Chesdale and the Kiwi, Huttons and Top Hat cured meats brands.

These are expected to benefit from Hart's cost-cutting zeal. Many of the existing Goodman Fielder baking, oils and spreads brands - which include Molenberg, Quality Bakers, Vogels, Ernest Adams, Meadow Lea and Newman's Own - are mature slow-growth operations.

Many were also part of the Goodman Fielder business Burns Philp took over and delisted from the stock exchange in 2003. It is the prospects for these businesses that have muted enthusiasm for the company among Australian sharemarket observers.

The deal is a plum for investment banks, worth as much A$30 million in fees. Credit Suisse First Boston, which has a long relationship with Hart and Burns Philp, is expected to take the lead manager role. Its local affiliate, First New Zealand Capital, is sure to benefit. Other banks thought to be in the running to share the fees include Goldman Sachs JBWere, UBS and Macquarie Bank.

The structure
* Graeme Hart's Australasian food business Burns Philp will retain a 20 per cent stake in the Goodman Fielder business it plans to spin off on to the New Zealand and Australian Stock exchanges.
* The business will be sold to investors worldwide and is expected to have a market value of A$1.6 billion to A$2.3 billion.
* The company is to be created from the merger of the dairy and cured meat assets Hart's private company Rank bought from dairy giant Fonterra and Burns Philp's baking, spreads and oils business.