re: awb buys wesfarmers rural = high risk With some background...

re: awb buys wesfarmers rural = high risk With some background in the rural industry I would say that investshould look for short term gains from this acquisition - but they will be in WES who have just made the deal of the Century.

How anyone could argue that the AWB deal is a good one for the AWB is beyond me. WES bought most of the rural business it has just sold (95%) in the last three years for around $400 million and has sold it for $825 million.

For WESthe rural business represented a timebomb that they wished to be rid of and it had been widely rumoured that they would try to get rid of it in the next year. Its returns were way below company benchmarks and it tied up vast quantities of capital in merchandise which sold for very low margins with high relatively fixed overhead costs.

Interestingly WES had always wanted selll its Dalgety/Wesfarmers business long before they acquired the crippled IAMA Ltd but couldn't find a trade buyer then.

They have been using income from their rural finance business to mask the relatively poor performance of this business imo and needed to find an unwitting buyer for the tarted up merged business.

have found this in the AWB, a business that desparately needed to diversify its own business with the growing risk of loosing its single desk monopoly on wheat and with growing competition in its harvest loans business which accounts currently for the vast majority of its income.

AWB had intended to use its fairly lazy gearing for a shot at FCL but in FCL it would have found firstly a very hostile (and capable) target and it would have been acquiring a heap of non-core business such as the Air International and forestry units which it would then needed to on sell.

FCL got crunched by up to 10% Friday as rumours about the deal spread around. It bounced of key support at $1.44/45. It will be interesting to see if it goes with AWB's 5% (now) overhang likely to go on the market to free up capital at least.

Rural merchandise are very very difficult beasts to run profitably and in Wesfarmers Landmark the AWB has found a large business which it has no experience in other than an interest to strengthen its grain acquisition channels.
I think this purchase has all the hallmarks of potential future disaster for AWB but, hell, who knows.

I'll certainly be watching FCL for further selling, WES should bounce strongly with a gross under achiever removed from its books for a 100% profit and AWB? Well, we will have to see.

The acquisition is apparently effective immediately, minus (noteably) Wesfarmers Insurance business.