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.