With the chase for casino assets bv Hosken Consolidated Investments (HCI) enjoying intense media coverage, it’s not surprising that the empowerment company’s recent snatching of a strategic stake in dairy group Clover Industries has been scantily scrutinised.

But the Clover deal is rather intriguing and may he an example of another value-laden opportunity tucked away in the army of unlisted agri-businesses in Soulh Africa.

Basically, HCI acquired 25m preference shares in Clover at 290c each late in June. as well as 19,3m ordinary shares at lOOc each. It’s the Clover preference shares that interest us. They’re currently traded on an over-the-counter (OTC) basis (see www.bjmdirect.com) and bid at 260c and offered at 290c.

At face value. HCI appears lo have paid a fair premium on the average share price for the preference shares over the past three months. That’s understandable, as HCI couldn’t have built a strategic by buying the illiquid unlisted shares on the “open” OTC market.

On a fundamental basis, HCI looks to have clinched a good deal for the longer term. The preference shares earned 20c/share for the six months to end-December 2004, offsetting the 37c/share loss for the ordinary shares.

HCI’s timing is also good, seemingly securing the Clover ordinary and preference shares at a time when the dairy industry is at a rahter sour point of the business cycle.

In the six months to end – Decmeber 2004, Clover saw turnover of R2.2bn reduced to just R5m at pre-lax profit level. The comparative period in the previous year saw pre-tax earnings of nearly R60m.

What has transpired in SA’s dairy industry is that market conditions have become much tougher, with competitors effectively “buying market share”. Consequently milk prices have softened considerably.

In March this year, Clover instituted a turnaround plan. specifically covering issues such as the reduction of the milk price. The plan will introduce a serious cost reduction exercise at Clover and a restructuring of the business to see the group being far more aggressive in the market in ensuring sales volumes.

Perhaps Clover will also look at its gearing (long-term loans are R400mi and short term loans R168m) in a bid to bolster its bottom line. Proceeds from the share issue to HCI will presumably be used to cancel some debt – which will be a relief, since financing costs were R3lm at the interim stage.

If Clover can outlast and outwit its competition, the medium term could be rather lucrative. Presumably that’s exactly what HCI would want to see transpire.

For punters with an appetite for unlisted stock, Clover – especially the preference shares – may well be worth a closer look at current levels.

Source: Finance Week – Marc Hasenfuss