AACo to raise $300 million

Cattle company forced to raise capital to pay down debts

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 12, 2013 11:14 am AEST

Australian Agricultural Company (ASX:AAC) 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 (ASX:GNC) 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 (ASX:ELD) cease to exist after selling off all its assets, and casts doubts over the future of companies like Ridley Corporation (ASX:RIC) and Ruralco Holdings (ASX:RHL).

Foolish takeaway

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.

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