Blue Sky left searching for positives after Binxi offer lapses

Invercargill based meat processor Blue Sky Meats is trying to put a positive spin on its prospects after being advised by Chinese cattle and meat company subsidiary NZ Binxi Oamaru that its takeover offer would not proceed. The main reason for the decision was failure to receive OIO approval by the 20^th March deadline, but Binxi also cited a material adverse change in this season’s performance. As a result Blue Sky has advised shareholders they will continue to own their shares, 96% having already accepted the offer.

 

The offer for 100% ownership at $2.20 per share placed a value of $25.4 million on Blue Sky compared with a current valuation of just under $15 million based on the last trading price of $1.30. Chairman Scott O’Donnell made the point adverse seasonal conditions are part and parcel of agricultural businesses, while NZ Binxi has asked the OIO to continue to process its application in spite of its withdrawal. It also signalled its possible willingness to reconsider if the OIO were to come through with a positive response.

 

Not surprisingly O’Donnell is not holding his breath after spending six months waiting for the deal to go through. The board of Blue Sky now optimistically plans to raise $2 million more capital, although it isn’t clear where this will come from, in order to improve yields and lift chilled lamb from 1% to 20% of its business. Financial performance has also suffered from an inability to process cattle at its Gore plant because the high cost of cattle made it impossible to make a profit. Last year’s result was a $2.7 million pre-tax loss and NZ Binxi’s reference to material change as a reason for withdrawing its offer suggests this year won’t be any better and may well be worse.

 

The new business strategy presented to shareholders in January which Blue Sky now intends to implement is expected to achieve a ‘step change’ in the company’s financial performance within three years. The directors will proceed to identify the source of the extra capital required to fund the strategy.

 

The material I have read fails to convince me that the board’s optimism is justified. The company faces a number of problems which suggest it won’t all be plain sailing, even if the equity raising is successful. In no particular order these are:

• Since buying the beef plant in 2014 Blue Sky has failed to operate it profitably or even succeed in having it running when cattle were available;
• Processing yields 3% below industry standards mean the lamb plant has underperformed;
• Inability to operate the rendering plant because of effluent discharge when there is too much rain;
• Optimistic target for increasing chilled production as percentage of total throughput;
• Insufficient scale of operations needed for optimum efficiency.

 

Meat company profitability depends largely on the ability to procure and process livestock competitively with other processors and then sell the output at or above the prevailing global price. Blue Sky Meats cannot afford to process cattle, its yields are significantly lower and its product mix dramatically worse than its competitors, and in spite of Lowe Corporation’s presence on its share register it doesn’t appear to be able to maximise its rendering potential.

 

The fact NZ Binxi’s offer had gained 96% acceptance suggests other shareholders including Lowe Corporation were keen to sell, probably recognising it was the best offer they were likely to receive. The next interesting question is where the new capital will come from – existing or new shareholders? Lowe, HW Richardson Group and Binxi are the three largest shareholders, all of which may be reluctant to increase their exposure, especially when the first two hoped to reduce it and the third has decided not to proceed with its planned takeover. It is also certain Alliance will have briefly considered and rejected the chance to buy the business, so there isn’t any hope from that quarter.

 

In the meantime Blue Sky must box on as well as it can, but shareholders must be prepared for disappointing results.

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Tags: Alliance, Blue Sky Meats, HW Richardson Group, Lowe Corporation, NZ Binxi Oamaru, OIO, rendering, Scott O'Donnell