Australian Agricultural Company (AAC.AX) has announced a $299 million capital raising to pay down debt, as it struggles with highly cyclical domestic cattle markets.
The company says it will raise $219 million through a fully underwritten rights issue, and off $80 million in convertible notes, as it looks to pay down debts of more than $400 million, complete the construction of the Darwin Abattoir, and give the company more flexibility in diversifying away from volatile domestic cattle prices towards higher, more stable global beef prices.
AACo is Australia?s largest cattle and beef producer, with more than 560,000 head of cattle and a property portfolio exceeding 6.5 million hectares of land. But the company has struggled to reward shareholders since listing, with debt and the number of shares rising, hit alternatively by droughts and floods and being a capital intensive business. And that?s reflected in the share price which has fallen 9% over the past 10 years.
Profits have been few and far between, and over the past five years the company has made a total loss of close to $90 million, despite revenues of over $1.4 billion, while the number of shares issued jumped 18% from 264 million to 313 million.
Now the company is attempting to turn the struggling ship around, by becoming a vertically integrated business, and hopefully for shareholders, increasing margins and stabilising earnings. But whether the move will work is difficult to ascertain. Certainly the company?s financial history says it may struggle, and AACo may find itself in the hands of an international operator if the strategy doesn?t work.
And it would be another sad indictment of Australia?s agricultural sector, with many falling prey to offshore companies, including AWB (the Australian Wheat Board), ABB Grain, and more recently Graincorp (GNC.AX) receiving a $3.6 billion takeover bid from US food-processing and commodities trader Archer Daniels Midland (ADM). But the sector?s poor performance could also see Elders (ELD.AX) cease to exist after selling off all its assets, and casts doubts over the future of companies like Ridley Corporation (RIC.AX) and Ruralco Holdings (RHL.AX).
While AACo has some invaluable assets, generating a decent return for shareholders has proven difficult. Existing shareholders will be disappointed about having to fork out more cash, and will be hoping AACo gets it right this time.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.