Alpcot Agro to acquire Landkom International | 20 December 2011

by World Grain Staff
KIEV, UKRAINE — Alpcot Agro and Landkom announced on Dec. 20 that they have reached an agreement for Alpcot to acquire Landkom.

Under the terms of the agreement, Landkom shareholders will receive one Alpcot share for every 22.16 Landkom shares. The exchange ratio has been derived from published net asset values, following adjustments, given that both Alpcot Agro and Landkom trade at significant discounts to net asset value, the companies said.

Once the acquisition is complete, current shareholders of Alpcot Agro will own 83% of the company and Landkom shareholders will own 16.43%.

The Alpcot Agro board of directors said it plans to list the company on the main market of the London Stock Exchange during the second half of 2012, and later seek a listing on the main market of NASDAQ OMX Stockholm.

“We are very excited about the opportunity to combine Alpcot Agro's and Landkom's operations. The proximity of our land banks in Western Ukraine enables multiple synergies. The balance of the combined entity's operations between Western Ukraine, Kaliningrad, and the Central Black Earth region in Russia allows us to mitigate any significant weather events,” said Katre Saard, director of Alpcot Agro Ukraine. “In both countries, we will have potential for significant improvements in crop yield. Both companies have made large strides in the last year toward improved financial performance, and we believe that our accumulated experience and the efficiencies created in the combined entity will increase the pace of these improvements.”

“Our ambition of becoming a substantial producer and processor of agricultural commodities for the global food and biofuel markets has become increasingly difficult to fulfill without access to substantial additional working capital. We need to refinance an important proportion of our working capital facilities if we are to operate effectively as a stand-alone entity and maintain, let alone increase, today's level of cropping,” said Neil Balfour, chairman of Landkom. “This recommended takeover provides Landkom with the financial stability to realize the full value of our attractive assets in Ukraine and its shareholders with the opportunity to be part of a much larger, multi-national group with more diversified operations and assets.


How to make a 'global top player' in farming, the Alpcot way | 21 December 2011

Alpcot Agro, the Ukraine farm operator buying Landkom International to form a "global top player", got a taste for what is in for last year.

In July 2010, its Ukrainian operations negotiated the $3m purchase of "distressed assets" of Polski Koncern Mięsny Duda (PKM), including a partially-built grain silo, in what it at the time called a "transformational step".

And that was for a 7,500-hectare business.

Landkom has more than 10 times as much land under control.

"But we like to think of the PKM deal as a bit of a dress rehearsal," Katre Saard, one of Alpcot Agro's three founders, responsible for setting up the Ukraine operations, said.

Strong yields

If so, Landkom could be in for a bit of a - positive - yield shock.

Alpcot Agro overview
Russian landbank: 181,400 hectares
Planted land 2011: 78,600 hectares
Employees: 1,300
Ukrainian landbank: 18,800 hectares
Planted land 2011: 13,700 hectares
Employees: 100

At PKM, Ms Saard said "we have seen a large improvement over one year," with a winter wheat yield of 5 tonnes per hectare, better than the Ukraine average of about 3.5 tonnes per hectare, which Landkom matched this year.

(Landkom talked of yields of a similar order" to the 7-tonnes-per hectare" achieved in Poland when it listed four years ago.)

In corn, PKM achieved a yield of 10 tonnes per hectare, compared with a Ukraine average, and Landkom result, of about 6 tonnes per hectare.

Indeed, it would match the result from MHP, the farming and poultry giant which set a European record for corn yield this year, of 19 tonnes per hectare at one farm.

'Lean corporate structure'

And this might even be achieved with less personnel.

Alpcot, which touts the input from US agronomists "used to working 24 hours a day" and from its cadre of "high quality managers", operates in Ukraine with one employee per 137 hectares, compared with 53 for Landkom.

"We have a lean corporate structure," Ms Saard said.

"At Landkom, there are a lot of efficiency savings that could be made. They are not as efficient as us."

One improvement will be in the revamp of the Landkom tractor fleet, which it emerged on Tuesday included only one machine less than three years old, and with many smaller than ideal for Ukraine's huge fields too.

The size of the machines, rather than age, was more of an issue, with Ms Saard saying Landkom's machinery had been "well maintained".

Land sales ahead?

Nor are operational improvements the only upside on offer, with the merger of the groups too to create a consolidated landbank of some 70,000 hectares in western Ukraine – a bonus in terms of the value of the portfolio besides presenting savings through cutting out duplicated costs.

"Sometimes, on the right side of the road is our field, on the left their field," Ms Saard said.

Indeed, Alpcot may sell some Landkom land in other, "less productive" parts of Ukraine.

"Western Ukraine is a great region to farm. It has stable precipitation because of the Carpathian Mountains," a big bonus in a country whose harvest last year was curbed by a dearth of rain, which has returned to impair autumn-sown grains this year.

The discount

Not that Landkom shareholders are not being asked to pay for this, in terms of accepting a discount for their shares.

The all-share deal, as of share prices last night, before it was announced, valued Landkom stock at 2.69p - a 14% discount to the market value.

That's unusual. Typically buyers pay a bid premium.

And ideas that Alpcot is getting all the value of the deal appeared to be only enhanced by a jump in its share price on Wednesday of 19.5% at one point. Landkom shares fell 20% to 2.5p.

'Shareholder support'

Investors should refrain from reading too much into this dynamic, Hannes Sjobladt, the Alpcot deputy managing director said, noting that shares in both companies were relatively illiquid, meaning "small orders can move the market significantly".

Furthermore, Alpcot shareholders, consulted about the deal more than two weeks ago, have been barred since by insider trading laws from dealing, and taking advantage of a stock price which had dropped 15% in December, ahead of the deal.

A high Alpcot share price was also beneficial for both sets of shareholders, given that Landkom investors will end up with Alpcot's Stockholm-listed stock.

Indeed, talks with Landkom's biggest investors revealed that they "all support the transaction", Mr Sjobladt said.

"The combined group will be much stronger."
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