Speculation swirls around meat merger
Sokolow and Farm Food could be stocks to watch this week as speculation swirls on whether these two leading meat producers move down the road to a potential merger.
A consortium of Swedish investors in both companies are pushing the merger idea, but they must convince majority Sokolow shareholder BIG Bank Gdanski (BIG BG) to either sign onto the merger plan or sell its 21% stake. A showdown appeared likely over the weekend during a general shareholders meeting, analysts said.
"Right now, it's speculation that the Swedes will take control of the company," said Bogna Sikorska, an analyst with CDM Pekao Securities. "It probably will happen, but the shareholders meeting will decide everything."
If the merger idea prevails, the new entity would create the largest meat producer nationwide with 19% market share and sales of more than zl. 550 million ($137.5 million) based on last year's combined earnings.
Last week, in the run up to the shareholders meeting, rumors resurfaced early on about the merger and by mid-week the press was reporting a possible back room deal that could pave the way for consolidation of the two companies traded on the Warsaw Stock Exchange (WSE).
Share prices in both companies jumped early in the week but gave up any gains by the close of trading last Thursday. Shares in Farm Food climbed more than 3% in trading Monday, but closed Thursday at zl. 10.9, up less than 1% on the week. Sokolow shares fared slightly better, spiking upward almost 10% Monday, but by Thursday Sokolow had fallen back to zl. 3.8 a share, up 2.7% on the week.
The grist behind the rumor mill is a consortium of Swedish investors that hold stakes in both Polish meat companies and Sokolow's quest for a strategic investor. Earlier this year, as Sokolow board members began buying up shares for sale, two suitors emerged as likely strategic partners: the Swedish Federation of Farmers (LRF) and briefly U.S. food producer Cargill. LRF later stepped forward and, through its subsidiary Lantbrukarnas Ekonomii, this summer acquired a 10% stake in Sokolow with consortium member Swedish Meat taking another 9% stake.
As LRF moved into Sokolow, LRF floated the merger idea saying it was interested in combining Sokolow with Farm Food, in which LRF holds 15% ownership.
But to reach that goal, LRF needs to overcome possible opposition from BIG BG. A deal appeared likely by the end of last week, as the press reported LRF and BIG BG had reached an agreement. However, those reports were short of details, analysts warned.
"I wouldn't rely completely on that information," said Pawel Malyska, an analyst at Bank Gospodarki Zywnosciowej (BGZ) brokerage. "I would treat it with some distance."
The issue will likely boil down to price, analysts said. Although analysts would not speculate on price, they said BIG BG would probably get less now than if it had sold out when the merger idea first surfaced in the summer.
Since the beginning of the year, Sokolow shares more than doubled to a mid-summer high of zl. 5.25 a share, but then fell 25% in September and have been trading in the zl. 3.7-zl. 4.0 range during recent weeks. Based on the zl. 3.8 share price last Thursday, BIG BG's 21% stake is valued at about zl. 38 million ($9.5 million).
The proposed entity would have a commanding position in the market here. Farm Food and Sokolow currently command 11% and 8%, respectively, of the Polish market. Other top competitors include Animex with a 12% market share and Morliny with 6%.
Animex and Morliny have foreign strategic investors with global clout to improve entry into foreign markets. Analysts questioned, however, what the Swedish consortium would bring to the table in addition to the ability to forge new markets.
After LRF acquired a stake in Farm Food in June 1998, it has not brought about significant changes in the company, Sikorska said. Only recently did LRF help secure an ECU 2 million loan for Farm Food. "That's the first action by the Swedes on behalf of Farm Food," she said.
Since 1997, Farm Food revenue has continued downward, and is forecast to fall almost 20% in real terms this year to zl. 237 million ($59.25 million), according to Malyska of BGZ. That downturn, however, follows a sector-wide trend that has witnessed a revenue collapse of more than 50% for some firms in the wake of the Russian crisis.
