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Black Earth reveals cash call to unlock Pepsi deal

Agrimoney.com | 22 October 2012
The main shareholders of Black Earth Farming are the Swedish funds Kinnevik and Vostok Nafta.

Black Earth Farming revealed an $80m cash call to fund investment needed for a deal with PepsiCo which will boost its presence in potatoes and sugar beet, and could account for 30% of group revenues.

The Russian farm operator said it had signed a three-year deal with PepsiCo, the food and drinks giant which is expanding in Russia, to provide potatoes and sunflower seed for use in making Frito-Lay crisps, besides sugar beet for other products.

The contract "could potentially represent 30% of Black Earth Farming's revenues by 2015," a factor which, with the group boosting its access to grain export markets too, "changes our profitability risk profile and growth potential", Richard Warburton, the group's chief executive, said.

Analysts expect the group to produce revenues of $212m in 2015, compared with $88.7m last year, although takings of agricultural producers are heavily dependent on commodity markets.

'Logical diversification'

The growth in the company's crop portfolio beyond its traditional grains and rapeseed also represented a "logical diversification", into "competitively advantaged" irrigated crops, he said.

Fixed-price contracts would also cut the group's exposure to volatile market, while dealing with a multinational giant such as PepsiCo would also lower counterparty risk.

However, the deal would come at a cost which Black Earth estimated at $35m, over three years, for raising its potato area to 1,500 hectares, and for specialist equipment, with a further $20m needed for achieving sugar beet output of 600,000 tonnes a year.

And this would require extra investment, in terms of equity investment, given "the company's current capital structure and the inherent volatility of its business", Black Earth said.

Fund support

The group - which needed to turn to main shareholders Kinnevik and Vostok Nafta, the Swedish funds, for $25m in loans to bankroll its harvest – said it would undertake a SEK530m ($80m) rights issue.

Kinnevik and Vostok Nafta and Black Earth board members, with holdings totalling 50% between them, had already signed up to the rights issue, for which pricing details will be announced on November 14.

The rights issue is expected to run from November 26 to December 7.

Separately, the group also revealed a pick-up in its harvest results from a disappointing start, with improvement thanks in part to a long-term plan for soil improvement, but also down to "better execution and management and more favourable weather".

Black Earth Farming shares rose 2.1% to SKE12.15 in morning deals in Stockholm.

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