Last year in June we reported dairy group Clover’s black empowerment deal with Hosken Consolidated Investments (HCI) was in jeopardy because of an inability to reach agreement over the best way to re-capitalise the company. HCI, which would no doubt be happy to trade fresh capital for additional equity in Clover, accused management of dragging its feet in sorting out a much needed capital restructuring. HCI CEO Johnny Copelyn went as far as to say he’d lost confidence that a capital restructuring would ever transpire.

At that point Fin week estimated Clover — in which HCI holds a 34,9% stake (as well as 44% of the preference shares) — could need anything between R400m and R800m to bring debt back to more acceptable levels. While Clover management recognised the urgency of a recapitalisation effort there were sensitivities about Clover’s farmer shareholders.

Currently, Clover — a former co-operative company — utilises a complex capital structure that ensures dairy producers (ie, farmers) effectively remain in control of the company. There are “delivery agreements” linked to ordinary shares between Clover and its producers, which are claimed as non-negotiable arid integral to the dairy farmers’ relationship with the group.

Copelyn has argued that for Clover to survive and prosper in future the group needed to shift its business model and free its capital structure from quotas. Clover management seemed wary of “messing” with its supplier/shareholder arrangement.

Fortunately, developments in December last year may offer an amicable solution to the recapitalisation quandary. Clover – without too much fanfare – pulled off a cracking deal when it sold its 45% holding in the Clover-Danone joint venture (JV) back to food multinational Danone for around R1,lbn. Perhaps the deal wasn’t that surprising, since Danone injected R181m into the JV in June 2009, a development that coincided with the transfer of the manufacturing and distribution facility in Boksburg from Clover to Danone-Clover.

But we still have to marvel that Clover, in what must be regarded as a dour global economic climate, managed to fetch such an attractive price for its stake in the JV. In Clover’s most recent annual report the Clover-Danone JV — set up in 1998 — was only valued at around R600m. The deal is made even sweeter in that Clover still gets to provide raw milk and distribution services to Danone for the next few years.

However, the truth is that Clover does lose a sizeable foothold in the dairy products market. The Danone-Clover JV holds an imposing 44% market share in the yoghurt/fermented products category through brands such as Nutriday, Activia, Ultramel and Inkomazi brands.

Of course, you have to consider the benefits of Clover settling its debt — especially in regard to pursuing new projects as well as revamping production and distribution. Clover executive director Manie Rode tells Fin week the company is currently looking at “a few very exciting projects”.

At the time of the sale, Clover CEO Johann Vorster spoke of a new beginning for both companies. For Clover, certainly, there’s now an ability to shift away from the limited growth scenario that came with holding high debt levels in weak economic conditions and times of a milk surplus. It should be remembered Clover’s finance costs were a hefty R175,5m in its last financial year.

The additional capital from the CloverDanone JV transaction should make a massive difference to Clover’s operational performance.

Source: Finweek – Marc Hasenfuss