Description

Agribrands, a 1998 spin-off from Ralston Purina, sells Purina-branded animal feed to the largest farms in Asia, Europe and South America.

Chairman, Bill Stiritz, has announced plans to merge Agribrands with another Ralston spin-off called Ralcorp. BUT MANY BELIEVE THIS TRANSACTION WILL NEVER HAPPEN AND AGRIBRANDS WILL, INSTEAD, BE SOLD.

Valuation
Using 10.5mm fully-diluted shares, AGX has a market cap of $425mm, which only slightly exceeds its $382mm book value. AGX has over $150 in net cash, bringing its TEV down to $275mm. With about 95mm in core-business EBITDA (normalized for currency fluctuations, excluding interest income) for both fy8/99 and fy8/00, AGX sports a ridiculously-low TEV/EBITDA multiple of 2.9X.

In a private sale what would AGX be worth? A good starting point is 5X core EBITDA plus the $14 per share in net cash, or $59.50, or a 45% premium to where it’s trading. Possible buyers (who could actually pay a lot more and still do a sweet, accretive deal) include multinational ag-companies like Archer Daniels, Conagra or Cargill and pure-play feed producers like Ridley and Nutreco.

Catalysts
In the announced merger with Ralcorp, AGX holders will receive three shares of the combined company. If AGX were to trade under $39, a cash election will be available for up to 2 million AGX shares at $39. The transaction will take at least six months and requires a 2/3 vote of both the AGX and RAH holders.

It’s very unlikely that AGX shareholders approve the deal, given what AGX is worth in an outright sale. There are just no synergies between AGX and RAH; the combination of unrelated businesses will surely turn off investors. On 9/15, a 5% shareholder, ThirdPoint Management, sent an angry letter to AGX, criticizing the proposed deal and urging the company to review other alternatives.

Read the letter at:
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=14399587

Ergo, AGX is likely to attract a bid. I would not be surprised if a bidder emerged in Q4 2000.

Downside protections
Like any good value investment, your downside appears somewhat protected. If no alternative deal emerges, AGX is unlikely to fall much below $39. At such price, the company would accept 20% of the AGX stock for repurchase. This would be highly accretive to earnings and you would be left with a very cheap company with savvy, stock-incented management.

Summary
Attractive valuation, big margin of safety, abundant near-term catalysts, . . . $2 down and $20+ up. Gotta like those odds.

Catalyst

The announced merger with Ralcorp (RAH) is unlikely to win shareholder support. Implicitly, this puts Agribrands "in play" with 45% upside to conservative private market value.