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AGT Food and Ingredients management tables buyout proposal

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The head of AGT Food and Ingredients is leading a push to privatize the company.

Murad Al-Katib and members of his management team have tabled a proposal to buy out shareholders at $18 per share, a 37 per cent premium to the July 25 closing price, AGT announced on Thursday.

Under the terms of the proposal, Prem Watsa’s Fairfax Financial and Point North Capital, two of the company’s prominent investors, would retain their equity stakes if the privatization is successful. The management group, which collectively owns 17 per cent of the float, said Fairfax is willing to provide financing support for the transaction.

AGT Food and Ingredients’ board has agreed to form an independent committee to consider the proposal.

Shares of AGT have been under severe pressure this year, shedding half of their value amid persistent weakness in global pulse prices.

I have been slowly buying this stock over the past few months, averaging down as the price has decreased.  Yesterday, the stock really dropped big time.  I delayed purchasing more until today.  I missed a big opportunity for some easy money.  Oh well, at least I made a little money this one.

My original reason for buying this stock was,

- stable and but growing demand for product (pulses and lentils)
- weakening Canadian dollar with a large amount of international sales
- easy to understand business (although commodity business - one drawback)
- nice dividend (3.5% - 4% yield)
- Fairfax backing

Interesting. Do you have a view on the ROIC it can produce?

Take what I write with a grain of salt.  I could be off in my calculations. 

For ROIC, I used the formula of (EBITA X (1- tax rate)/(shareholder equity + interest bearing debt)

For the past four years, I calculated (2017 - 6%, 2016 - 10%, 2015 - 10%, 2014 - 10%).  Average 9%.

From my quick reading of the company MD&A, and other websites, there appears to be a glut in lentils at the moment.  According to Ycharts website, the price was at a high of 42.70 in May 2016.  It is now currently 22.10.

I had looked at this before the big drop in the share price.  Never liked the leverage and the capital allocation (too many acquisitions, too high of a dividend).  The core lentils processing business seems good but there was way too much debt during the good times for a cyclical business like this.  Once the downturn hit, they were in a very tough spot.  They got very lucky with the financing they got from Fairfax last year, but even with that, they we were going to breach covenants.  Fairfax was always going to move to protect its investment, so the risk for shareholders was that the business does not turn around quickly enough and the company taken out at a low price or needs to go get more dilutive financing.

I feel there is one more year of tough conditions for the lentils business.  Prices are low so I think lentils seeding was low this year.  Given that, I think $18 is a good price.


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