CBH - The Empire Strikes Back - 2nd Edit 25/02/2016

Yes a deliberately misleading title, yes deliberately sensationalising the current drying of paint we call due diligence that we can't see (nor should we). So at this point may I say... "Made ya look"

However...seeing a couple people I didn't previously know emailed me I thought I better reply with their concerns. Firstly, not sure how you got my email address but well done and more well done because the Gmail account linked to this blog I probably only check once a month at best...so smart finding and lucky I read it now. Coulda easily been months before I'd read them.

Couple of pick up points from the emails...

1. "You people of the antiquated Co-operative mindset are of a socialist ilk..." - I think there's some folk who, through no fault of their own, have an ilk of their own and its keeping them from seeing things clearly as they are. To me at least there is no ilk to be had. In my shed I have Metric spanners, AF spanners, Whitworth spanners and bloody big hammers. Each is a tool for a specific job. Co-operatives are not anti now, not anti "commercial" and not anti Public Listed Company. They're all just different tools with different uses in different situations. As for Socialist ilk, sorry it is probably time to rethink that because that could be interpreted as simplifying it into 2 camps when there's so many shades between "socialism" and what ever some folk think is the opposite. Trying to lump Co-Ops into the same camp as a political ideology that caused an unknown number (millions) of deaths is pretty poor taste. People working together for a common goal, pooling resources to build quarantined benefits for the members and the community is not such a bad thing and isn't socialism. Should add that the "3rd sector" which is the Not-For-Profit sector, which includes Co-Operatives is huge in this country and worth many billions of dollars, employs thousands of Australians and along with delivering returns and quarantined benefits also delivers social dividends that don't show up on anyone's profit/loss or balance sheets. Another now gone Co-Op, United Farmers (now what's left of it being foreign owned) came into the market and other companies recognised the competition and got hard on the price competitive lever. Same happened with CBH's entry into the fertiliser market. Ironically another fault improperly levelled at CBH is it cannot deal with competition, yet it, like United provides it. As for United Farmers life...well weknow it got taken over by foreign entity right?
2. "It doesn't cost anything to assess the offer, that's scare mongering" - Well not intended to scare monger at all, its just a fact of doing business. Management doesn't ring me with numbers or concerns but I do know from chairing Business Committees on different boards, assessing deals, Mergers & Acquisitions, Partnerships...whatever, contain risks and opportunities and tallying them all up into digestible numbers worthy of making a good and proper decision on is not easy, is not quick and is not free. Will CBH tell you how many members of staff were involved in crunching the numbers, how many work/man hours were taken up by staff or how much outside advice was contracted in? I don't know, but I expect it to be very significant. Thing is whatever it costs is money well spent if you're thinking its a good idea to ensure the directors/the board are fully furnished with the best information possible to make the most informed decision possible. Its their job to do so, its required under Federal Law. Its quite serious and anyone trying to hide information can get in a lot of trouble too. Its not scare mongering, its highlighting an aspect some members may not be aware of. Its part of the process, it is what it is. It does not make it a dud deal or great deal, it equips the directors to fulfil their fiduciary duty and come to a decision.
3. "We'll just have to see which way the directors vote and hopefully some will get voted out on their decision" - Ah this is important. In a board, all the board is responsible for the resolution they come up with. Most boards rarely have a vote and dysfunctional ones will have someone pipe up with the old "Let the minutes record I opposed this decision completely". Dysfunctional because if its resolved by the board in a way you don't like you ONLY HAVE TWO ALTERNATIVES. Stay on the board and know you are 100% liable equally as every other director OR YOU RESIGN. There is no safe harbour saying "I opposed it but didn't have the numbers". I think a person should be encouraged to vote, encouraged to vote anyway they like but be aware its not a popularity contest. Its a skill set and its a position of legal liability as they carry out their duties every day. Now remember the AGM is the members meeting, its where the members get to ask whatever questions they want of the board. That's why many refer to it as the Member's Meeting. Its where issues are raised and people get to vote. I heard one person comment on the poor 51% turn out at the recent director elections. Disappointing maybe, but one should look at the average turn out because more often than not 30% is a good turnout at most board elections.
4. "You'll be disappointed when this goes through but you'll see it was the best outcome on offer" - My position on whether it stays Co-Op or goes publicly listed can best be summed up in just two short words "STAGGERING INDIFFERENCE", but I have a position I think is best for WA grain growers. Of course I'm not privy to the whole deal and how it affects CBH now & in the future and grain growers now & in the future. At its best this deal will have much complexity most of us will not be aware of. I have no reason to think the AICD trained directors on the CBH Board won't be able to fulfil their fiduciary duty, satisfy a reasonable person's test and exercise all their rights, roles and responsibilities. That being the case, if you elect directors you do have to listen to their decision/recommendation. Will this be put to the members for a final decision? Maybe, unsure what their procedure is on this. Time will tell but I wonder what happens if the offer is rejected. I'm kind of thinking there'll be another (un)Social Media backlash.
5. "Why are you so anti shareholder base, it brings better direction and a better strategy going forward" - I'm not anti shareholder, I hold shares in companies, that's not an issue and again, whatever works best for the majority of members is all good. The downside with the "shareholder base" is the entity is no longer controlled by the customers who are the owners. A distinctive division would begin with public listing, one between customers and owners, they're two separate groups, no longer one. With ownership goes the control and the profits. You need to work out which suits you best and a person who wants a lump of cash now, plus some shares they can sell once the company is floated because, well because they need the money now is not making a bad decision necessarily, they're making a decision that, based on their circumstances is the right decision. The director's position is simple, if they personally need the cash in a real hurry, they'd have to step aside from the decision, because their own personal advantage does not come before the greater benefit of the majority of members. I think the board has direction now, as I understand it, no one's been elected to the board on a platform of "I support and will endeavour to try and break up the Co-Op and see shares and cash are issued ASAP". So not seeing the wrong direction. As for strategy, that's board domain and whilst they may talk in broad terms about strategy at times, its the board province so if you think there's no strategy its either a guess on your part, a lie on your part, a lie someone else has told you and you've swallowed or its true and you have at your disposal a director happy to leak information out of the board. I have no reason to think the board has a leak...so I'd cautiously lean towards one the others, none are helpful. Sorry. Gotta cough up or pipe down sometimes. Which is it? :-)
6. "Yes shares would be up for sale if need be and borrowed against but we'd be telling people its better to keep their shares to retain control and that's what most people would do" - So conceding control of the entity IS a valid and important concern. Phew! That's one thing conceded, albeit by just 2 people :-)
   If shares can be bought and sold, people can and are entitled to buy and sell shares. Now if an overseas company like ADM were smart, they'd be thinking make a good share offer, below takeover tripping point and become a major shareholder, possibly elected a Nominee Director, which they'd be able to do and be quick to influence the direction of the company every legal way they possibly can. Maximise profits, shave off the less productive parts of the business, build on the other areas.
   ADM own just under 20% of GrainCorp. ADM is a foreign company.
   Just other things to think about because you cannot guarantee control or pricing or a lot of other things when you're just the customer with  some shares...and you cannot be assured all farmers will retain control because as saw in the case of Wesfarmers they lost control of the company and eventually Wesfarmers sold off all of its agricultural arm except CSBP...which supplies a lot of mines as well as farms.
7. SO CBH's AGM was yesterday and already I've heard 3 journalists comment about being locked out of the AGM and they sounded, well not angry but a tad miffed with an slight air of "I can't believe..." about them. They won't read this but if they did I'd shake an index finger at them and with stern voice bellow "LISTEN CAREFULLY..." but instead I'll just type it calmly.
   
                                    THE AGM IS THE MEMBER'S MEETING.
   
   Its the one "board meeting" where the directors outline the year that was, outline the year ahead, listen to concerns, report on financials and a number of other things the OWNERS (the members) need to know, or want to know. If they ask for the media to be absent it is not only valid, legitimate, its also perfectly understandable. This is a pivotal point in CBHs history. This is a very sensitive time with many question still unasked and unanswered. I understand that the members are noting there is no guarantee that a public listed company will stay grower owned, indeed it won't, it can't and it would be completely against the concept of being floated and listed if it could be solely or majority farmer owned. List it, the control is lost. Now I was told "Oh but we'd be encouraging shareholders to retain their ownership" which is a hollow false front. Its listed, it will go. As shareholders retire, they'll cash in for that extra cash shot in the arm...control gone.
   And who, what where about GrainCorp, the eastern states, part foreign owned company with a P/E ratio of 60 and a dividend return of 1.17%. It opens the door for ADM to own nearly 20% of CBH and GrainCorp could own that or more...and ADM own nearly 20%. If ADM ever get to succeed in their take over of GrainCorp (only just failed a few months ago)...well foreign ownership or domestic, its gunna be less farm owned and what happens after the dangle-carrot date of 5 years cap in the deal? Oh think usual business practice will pop up.
   And what of the AGC directors? Who are they and what do you know about them? How many of them have a history in grain, some do and some don't...and some have already said they're looking at a "Wesfarmers moment"...where grower control was completely lost.
   I read someone say "Yeah but Wesfarmers owns CSBP, don't forget that" - So, they have a less than 10% segment of their business that has market dominance in that area...owned by non growers. Point invalid and irrelevant.
   BE VERY CAREFUL WHICH WAY YOU VOTE, FOR WHAT YOU CHOOSE BECAUSE ITS LOOKING DECIDELY LIKE YOU WILL GET A GOOD SHORT TERM WINDFALL BEFORE YOU LOSE CONTROL AND POTENTIALLY LOSE OUT FURTHER IF IT TRULY IS A WESFARMERS MOMENT...
   And please remember it is not only legitimate for the members to ask for the media to step out of AGM discussions, its far from uncommon, its not nefarious, naughty, covert or anything bad...its the members exercising their right to have the Members Only at parts of the Members Meeting, the AGM.
8. Yes there's more...I'll edit/update other email lines needing a response. Might add, I welcomed their views, they weren't abusive and to their credit they do give a hoot. Some will ignore the entire process, just as many waste their director election votes

 

CBH & the AGC Offer. (Edited 21/02/2016)

Its been a interesting watch and listen even within only hours of the announcement an offer had been submitted to the board. Social media went abuzz and all sorts of views popped about. Some notable things so far.

WA Country Hour has had 2 listeners relay their view that the "emotion needs to be left out" and I was wondering who had actually got all emotional. Its early days and the offer will no doubt impact on not only the current business of CBH but also what ever they have planned in the next year or two or even further out if they have bigger long term plans/projects they're working on.

So this is going to take them quite a while to sift through and see how it even slightly ripple affects lots of diverse angles and levels of the CBH business. I don't know if a decision date was pencilled in but I doubt it'll be sorted in just one short week...maybe it will. Then all the computations, variables and possible outcomes will have to be looked at. Its a pity in one sense that some staff will be taken away from normal day to day work load, there will be a hidden cost in assessing the offer. Part of doing business, just a point often overlooked. Having said that, its not insignificant. It will be an interesting number to learn. Unsure whether the board will reveal the number and its impossible to do anything except dart board a number right now. At a guess, the cost to directors, management, staff, legal advice and lost productivity is going to stretch it out. Could be a $100,000 or it could be close to the million. Your guess is as good as mine but my guess is the higher end of that range. Its not going to be insignificant nor irrelevant. The Grower/Members will probably ask, but the members need to be aware, the directors have a legally binding thing called Fiduciary Duty. To exert proper due diligence as well as do the offer real justice they are going to have to reach out and assess it properly and fully. Members need to be aware the offer will affect the effectiveness as far out as currently planned future projects reach. Its not a simple matter, its a complex assessment that leads in all sorts of directions and impacts on returns in every pathway.
If its thorough, the assessment won't be cheap and there's bound to be some "in kind" costs that won't hit the calculations of cost the assessment.

It raises a few concerns, which is not to say its a great offer or a dud deal...just underlying concerns over some comments that are floating around.

1. "The directors need to look seriously at the offer and not dismiss it on ideological grounds". Odd concern really and shows some folk aren't aware of a director's fiduciary duty and the ramifications of failing to fulfil that duty. There is no safe harbour under the Corporations Act for failing one's fiduciary duty. That duty is owed, by the director, to the shareholders best interest along with the perpetuity of the entity. So if they decide the offer is in the best interests of the majority of members & is helpful in keeping the entity going then they will support it (and perpetuity of the entity is not keeping it co-op, changing structure can easily be supported if its in the members best interests). Now if the directors failed their fiduciary duty, they are personally, legally liable under the Act and could find themselves in a huge legal mess and huge financial loss. With so many of the directors being AICD trained they would know full well they have to make a decision and it has to be what a reasonable person would decide in the best interests of the shareholders. (Yes they're members but shareholders/members are interchangeable words)
2. It includes a "corporatised" change in structure or includes a change to a "commercial" model.
   Yes, but to be accurate its a change from a Co-Operative model to a Publicly Listed Company on the ASX. Its already commercial and we shouldn't misuse the word. Corporatised hides the fact shares are bought & sold which can and mostly likely will lead in a loss of control and a formulation of a Dividend Policy. Under the Co-Operative model, whilst its profitable, it doesn't make profits, it makes returns. Returns are used to deliver further benefits for the members, either by investing, lowering costs, return rebates etc. At present, no money is taken out of the pot to pay dividends to shareholders who may well include speculators, day traders, metro based mum & dad investors, institution, overseas competitors, Merger & Acquisition aspirants. Look to Wesfarmers and you'll see whilst many farmers did not sell shares after it changed from a Co-Op most shareholders are not farmers today, control is not ours and never will be again. Once listed, the control is gone and an additional war chest drain goes into dividends. Wesfarmers does no business with farmers except insurance (along with anyone else) and fertiliser through CSBP. It is not a agriculture based company, its a coal & hardware leaning industrial conglomerate. In CBH's case, members converted to shareholders with a tradable share and some money in the pocket up front are in essence selling, whether they hold the shares their allocated or sell them. They're selling control. Please don't be fooled.
3. Strategy is lacking -Unless you're on the board I'm not sure how you can say this. Strategic thinking is the domain and responsibility of the board & is rarely shared outside of the board due to commercial advantage. Strategic Planning is the role and job of management. Unless you're in the board room, you won't know exactly what the strategy is. And rightly so or you've delivered yourself to the feet of your competitors. I haven't seen the offer but one of the people involved with AGC did phone me for a very long phone call, unpacking aspects and concepts of the offer without going into confidential areas or commercially sensitive areas. Why me, yeah we had a facebook exchange, respectful but differing and while he was attending to brush fires from (un)Social Media I did appreciate his call and I think he's coming from a noble angle (no that's not an endorsement of the deal). Some of the aspects of business direction and weighting of domestic to overseas income was interesting. Some of these facets were deliberately explained in a fairly conceptual fashion which I very much understand and respect. Some of these, from the outside at least, appear to be able to be integrated into the business (in theory) without a change to a publicly listed company. I say "in theory" because I do not know the board's strategy or the viability of some of these possible new enterprises/investment.
4. Lack of proper skill set on the board
   Unsure how this point was worked out. I think it wasn't. I think all of the directors are Australian Institute of Company Directors (AICD) members, most are graduates of the flagship course (yes I am too) and some are even Fellows of the institute. There's also at least one MBA on the board. How much skill set is missing exactly? If you haven't got a particular skill, you get in professional advice. I have no reason to think that doesn't happen on the CBH board. If you haven't got a particular training in an area, it gets picked up in Director Performance Evaluation sessions any board should be having regularly. Its an ongoing thing, director education IS and ALWAYS should be a regular part of a board's life. I have no reason to think this isn't happening.
5. GrainCorp -
   Yes, that company name is not necessarily a concern, but the directors will be aware already of the GrainCorp group, its core business, its recent business history and its financial health. It may not have been greatly well known before the offer, it will be now.
   In a nutshell...here's were that is at as found via ASX website.
   a)  $1.35billion market cap (that is simply the number of shares multiplied by the actual share price)
   b)  Its just survived an unsuccessful take over bid by American giant ADM which looks to only have failed due to the intervention of the Australian federal Treasurer.
   c)  It has a dividend policy of paying between 20 & 60% of net after tax profit into the dividends. Even with that policy its dividend yield is currently sitting on 1.17%.
   d)  Then there's the Price/Earnings Ratio. It is not the be all and end all ratio, but it is a serious and significant first look ratio. Yes you should be using a range of different ratios when "casting" a company's financials but the P/E Ratio is a good first point of call. If investing, you get good value from 8-12, you get a little less value from 12 - 18 and once it goes over 20, well your value is greatly reduced unless something big, positive and changing is unseen on the horizon. No I would never invest in a company that has a P/E Ratio of 40, but that's just me. GrainCorp Price/Earnings Ratio is 60. To really craft out what and where the lack of value in their financials are and what exposure it presents in the event of a public float, well the board will have to be quite busy for sometime.
   e) Now this is just me and can be argued not really relevant to the offer directly but some of the proponents are ex CBH directors. If this offer were going to directly affect me I'd be grabbing all the Annual Report from CBH and looking up the directors and see what these ex-directors had in the way of sitting performance at board meetings. If they'd dropped below 80% then I'd think unless there were extenuating circumstances they probably weren't as serious about CBH then as they are now trying to set it up as a Publicly Listed Company.

So...there's no emotion here, not sure where else. Unable to deal with competition looks debatable, skill sets isn't because its supposed to be an ongoing process of continual assessment and improvement...and I'd like to think that the ex-directors were aware of this at the time if its a fact and wonder why its only an issue now. Hmmm? Its going to come down to numbers and net benefit to members vs net cost to members in the longer term. I'm not privy to what the board will be considering or how they will be considering it, but due to them having to know the seriousness of their fiduciary duty, I'd expect them to be very thorough in their consideration. As this will get scrutinised by the members I'd expect them to be doubly diligent.

According to the ABC Radio's "WA Country Hour" the board has a grower's advisory group and I'd expect they may get a better briefing of what decision is made and on what grounds. In the end, even if a number of members aren't happy, the directors are duty bound. If a decision was made that was in the members best interests and at the members wished to have contrary decision, if it were me I'd resign to be safe. That's because at the end of the day, the directors are legally, financially liable for any decision they make and any decision not made...because not making a decision is a decision.

Now whilst there is currently no emotion showing, once the decision is given members will expect a good explanation and quite rightly. However some of it may have to stay in a broad sense only or confidential as some information of the proposal may be commercially sensitive. That's going to be a difficult point for the board to relay because, I'm sorry, there are numbers of members who aren't aware how a board works and what a director's role, rights and responsibilities are. Its an area for the board to look at when the dust settles. Its this bottle neck of understanding that may be hampering proper widespread engagement.

Commercially sensitive is code word for cover up with some government departments of late but the directors should be well versed in what they can and can't say & I'd expect on top of whatever media policy the board has, the Chairman will be the main talking head on this.

Then there's positives if the offer is rejected. In a broad sense parts of the offer, for example where business focus should be, how charges are worked out and a number of others things maybe integrated into the business easily after the proposal is rejected (if and when). So if you're of an emotional ilk, be happy. CBH may well find improvements even if the offer fails or on the other hand, the offer may just prove to be too good to refuse.

One thing is for sure, currently a Co-Operative quarantines returns for the benefit of the members, there is no profit making via share sales or dividends and the customers and only customers can own and control the business.

Publicly Listed Companies can be share targets, can be owned by anyone and the owners will eventually be predominately be non farming people at some point. The growers are merely customers, providing an income for the shareholders.

Yes, careful what you wish for. I do think that whilst the offer maybe had to come when it did, there's a number of wider conversation that needed to take place first. Among them, what a board does, what a director can and cannot do, what are their rights, roles and responsibility...and exactly what does fiduciary duty mean and how is it that this a director's duty that protects the members/shareholders.

These are some of the things the Board and Management may need to communicate across to members so there's less confusion about director's rights, roles & responsibilities. Do most of the members know what corporate governance really is? Condensed and distilled to its simplest form its the systems & processes you have in place to make sure what's supposed to get done, does get done and what's supposed to not happen doesn't. The members need some basic education, raise that bar you raise the entire membership knowledge base. You narrow the divide, you bring everyone closer.

Interesting times ahead.