Durban - Afgri, the listed agricultural services group, has sold a 26.77 percent stake in Afgri Operations to consortium Agri Sizwe Empowerment Trust for R502 million in a deal, which, the group says, is the largest black economic empowerment deal in the agricultural sector to date.
The deal was announced yesterday at the presentation of Afgri's interim results, which showed the group's revenue was 14 percent higher at R2.85 billion. Earnings a share rose 70 percent to 43.7c.
But the company warned that, in the second half, the effects of the strong rand, the resultant lower commodity prices as well as late summer rains were expected to have a negative effect on its earnings.
The empowerment deal, which took 18 months to negotiate, brings into the Afgri fold empowerment groups representing farm workers, rural women, emerging farmers and black business people.
The deal will be funded through a Land Bank loan that will be repaid over eight years. Afgri will provide security of R100 million for the loan.
The stake in Afgri Operations held by the Agri Sizwe Empowerment Trust will convert to a direct 25.1 percent holding in Afgri Limited once the loan is repaid.
Dominic Sewela, who is the deputy chief executive of Agri Finance, said the partnership with the National African Farmers' Union, which represents black farmers, and the National Red Meat Producers' Organisation, which represents developing farmers, will over the long term offer opportunities for Afgri in terms of new customers and networks.
Sewela, along with another empowerment partner, which has yet to be selected, will sit on Afgri Operations' board.
Jeff Wright, Afgri's managing director, said: "Opportunities as a result of the deal will be, for example, parastatal business, where we will now have an entrée in terms of supplying equipment and animal feed."
Afgri will also now be in a position to advise on land claims and assist successful land claimants in maintaining the productivity of
their land.
Afgri shareholders will receive a special distribution of R367 million, or R1.105 a share, from the proceeds of the transaction.
The costs of the transaction for Afgri amount to about 1.8 percent of the group's current market capitalisation, which is R2.37 billion.
These costs include capital gains tax, income tax recoupments relating to the disposal, costs related to implementing the transaction and the opportunity cost of investing R100 million of the purchase price as collateral.
The group's results were satisfactory, "particularly in light of the difficult conditions facing the agricultural sector, notably lower commodity prices and the impact of the strong rand", Wright said.
"The strong rand had a negative impact on commodity prices and margins over the interim reporting period. Despite this, the group's cash-generating ability was markedly improved over the period."
Revenue was boosted by the Natal Agricultural Co-operative (Natalagri) acquisition and the sale of farming equipment in South Africa, Australia and Zambia.
Revenue in the group's retail business was marginally higher, but the cotton business remained under pressure due to lower world cotton prices, a surplus of lint and the stronger rand.
This was compensated for by improved performances in the animal feed, protein and finance services businesses.
Revenue growth in commercial services to R1.3 billion had not translated into increased profitability as expected. This was mainly due to reduced margins in capital equipment, spare parts and agrochemicals as a result of the strong rand.
Cash generated from operating activities was R79 million after paying dividends of R80 million. This represents an improvement of R161 million from the previous period's negative cash flow of R82 million. The net cash position was R162 million, down from R235 million at the end of February because of a number of acquisitions.
During the six-month period, the company invested R16 million in an insolvent lemon oil business. This business has struck a deal with Coca-Cola and the venture is expected to become profitable within 12 months.
Other investments made by the group, which amount to R50 million, were factory upgrades, new technology, a shrimp-feeding facility and a joint animal feed venture with Eastern Cape Agricultural Co-operative.
Afgri disposed of its 50 percent share in Early Bird Farm to Astral for R250 million in cash and a cash dividend of R25 million.
The group sold its 49 percent share in Western Cape commodity trading business Bester Voer en Graanbeurs. The net profit from these disposals was R55 million.
Wright said the challenge ahead was the integration of Natalagri and improving the group's supply chain logistics. The reduction of fixed overheads in the retail division would be a focus.
Since Afgri was unsuccessful in its bid for Boland Agri, the group was revising its plans in the Western Cape.
Afgri closed 25c down at R7.15 yesterday. The food producers and processors sector dropped 0.04 percent.
Fact 1: The SA Plantation and Allied Workers' Union (Saapawu), an offshoot of Cosatu, promotes the interests of farm workers and landless tenants. It has merged with the Food and Allied Workers' Union (Fawu) and will hold its share in this deal through Basebenzi, an investment company of Fawu and Saapawu.
Fact 2: The National Red Meat Producers' Organisation is tasked with promoting the interests of emerging farmers and black business people in the commercial red meat industry.
Fact 3: The National African Farmers' Union offers services to emerging commercial farmers.
Fact 4: Bunang Sizwe Investments, a women's empowerment group, creates business opportunities for rural women.