Merging landscape: Viterra gets life from the land, and field of growth opportunities.

On May 29 2007, Saskatchewan Wheat Pool Inc. (the "Pool") acquired Agricore United. The transaction marked the beginning of a new era for Canadian agriculture and for the company, which launched its new name and brand last August.

Viterra, which stems from Latin origins, stands for 'life from the land.' The company's logo reflects a healthy plant and a growing organization. The new identity has changed the face of Western Canada's prairie landscape, bringing with it an agri-business that has the scale and resources to win in today's competitive agriculture industry.

It is a transformation that has been seen in other business communities in Saskatchewan. Indeed there's a growing trend amongst organizations which includes Saskatchewan's Credit Unions, IPSCO, Meadow Lake Pulp Mill, for example, that has resulted in a trend of bigger companies competing in the provincial marketplace.

"You'll continue to see an acceleration of this nature," says Viterra CEO Mayo Schmidt, speaking on the trend of mergers, takeovers and acquisitions that are becoming more commonplace overall. "We have to be stronger, faster, than we've ever been before. When you think about technology, individuals and businesses today are connected by BlackBerries or iPhones. We're in communication all the time."

"It really is a case of acquire, integrate, innovate to be successful in these industries," he adds. "To be successful, you just can't stand on the sidelines. You have to be prepared to advance your interests, and that is what Viterra plans to do as we look for new growth opportunities."

What makes the transaction that created Viterra such a noteworthy event is the fact that, prior to the acquisition, there were vocal naysayers who were saying it was improbable, if not essentially impossible, for the Pool to pull it off. The transaction itself came in at $1.8 billion, which was an accumulation of successive bids over the course of seven months. The Agricore United investors received $20.50 per share in the deal, which was closed June 15, 2007.

To fund the acquisition, Viterra raised $925 million through the use of subscription receipts and private placement offerings. This is significant, because it marked the first time subscription receipts had been used in a market-driven bid for an acquisition. Schmidt acknowledges such an accomplishment was a strong signal of the market confidence in the deal and in Viterra.

"If you do the math, we went from about $500 million market capitalization to about $2.5 billion. These are real interesting numbers," Schmidt says, adding the bottom line was similarly affected. "We achieved $111 million net income over the last 12 months."

Such performance clearly validates the rationale behind the move, says Schmidt, emphasizing it was done to improve the financial flexibility and stability of the two organizations.

"Our current focus is on the smooth integration of our operations to maximize efficiencies and capture estimated synergies of $96 million," he notes. Viterra expects fully annualized synergies to be realized in fiscal 2009.

"Viterra is well-positioned with strong geographic representation across Western Canada and operations in the United States and Japan," Schmidt adds. "The merger reduced the risk profile of both companies and gave us a platform for growth in North America and abroad. Increasing our presence does more than expand our markets, it is a shock absorber against short-term volatility in any one area. Swings in commodity prices, weather and political events can shift market conditions. By expanding our reach, we build upon and protect our enterprise."

"It was our view at Viterra that the sector was in position to experience rapid and dramatic growth in both opportunity from commodity prices and also the opportunity to be positioned to capitalize on global trends," Schmidt continues. "We felt that the creation of Viterra would bring the ag industry to a new level of maturity and it would allow us to seize unprecedented opportunities in agriculture."

"There were really two groups," Schmidt furthers of the market-watchers. "The largest group that had an opinion, which would be the investors, they had a very strong view that it was absolutely the right thing to do. Then there was the vocal minority that had an opposing view. They didn't see the opportunity."

Schmidt points to the fact that prior to the acquisition, Agricore shares were trading around $8.60. As mentioned, the buyout value was $20.50 per share. "Typically in any acquisition, for the bidder, share (prices) come under pressure," he notes. "Our share price has gone from $6.80 to around $13 today. The market has spoken, and the financial highlights that we've been able to achieve have been fairly dramatic as well."

Indeed they have. In looking at the metrics from which to measure, the 12-month sales went from $1.6 billion to $3.5 billion year-over year. The EBITDA (earnings before interest, taxes, depreciation and amortization) went from $80 million to $258 million, an increase of $178 million. As mentioned, net earnings went to $111 million, an all-time high for either of the two organizations. Cash flow went from around $40 million to $204 million. Meanwhile the short-term debt of the two companies has been reduced to a 31 per cent debt-to-equity ratio, while the long-term debt has been reduced to 14.6 per cent.

"From every measure it has been a tremendous success," Schmidt says, adding that such financial performance is not an exception due to the buoyancy in commodity prices and the ag sector overall, but rather is anticipated to occur year-over-year.

"It's supported by the strength of agriculture, but it's not driven by it," he explains. "This is a level of achievement that we expect to be able to maintain, or exceed, going forward."

Schmidt concedes it's an exciting time to be in the agriculture sector. For the first time in recent memory there's a real, justified sense of optimism overriding the sector. He credits this to what he refers to as four main drivers: global population, economic growth in foreign countries including China and India, demand for biofuels, and lastly, a diminished world supply of grains, which currently sit at 50-year lows.

This, when combined with Viterra's new structure, economies of scale and efficiencies, can only lead to bigger and better things for the organization, Schmidt says.

"The combination of the companies has really positioned us to capitalize on global trends," Schmidt says. "Viterra's scale and resources, now allow us to be more competitive than ever internationally. Our strategy is to extend our reach through both operational improvements and growth, and diversification."

"The two distinct goals in the growth strategy are to maintain and expand the strong core business," he continues, going on to specify. "The businesses that we have historically operated in will remain our strong focus. Secondly, we're going to seek new value-added opportunities that leverage the strength of the organization; it's core foundation."

"I really view the creation of Viterra not as an end goal, but as a launch pad for growth."

Schmidt adds that this growth is not exclusive to his company, but will also include Viterra's customers and shareholders.

"In this journey to grow the organization and position it to capitalize on global trends, we intend to take our foundation--our foundation customers, and our producer base--with us in the journey. They will also participate in what we think is an extraordinary opportunity."

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He points to the creation and expansion of Can-Oat Milling as a prime example of such an opportunity. By having an additional buyer in Can-Oat, Schmidt says, producers have more options and thus a larger demand base for their oats. He says as Viterra forges its way with its new identity and mandate, these opportunities will only grow.

"As we extend our reach, there will be opportunities for producers in every segment that we're in," Schmidt says, going on to note that Viterra operates approximately 100 grain terminal facilities across the West, as well as 276 agri-product sites, with many other strategic assets as well including sea ports and feed mills, for example.

Preferring to look forward to new and exciting opportunities, when pressed, Schmidt admits there's a sense of satisfaction when looking back at the road traveled to get here. Saskatchewan Wheat Pool was burdened by massive debt when Schmidt arrived in 2000, and many were predicting an untimely and unfortunate end for the then-76-year-old company.

"That type of discussion existed, agriculture was under extraordinary pressure around 2002 through 2004 with drought," he begins. "The company had some legacy issues that we were dealing with. However in 2003 we led a financial restructuring that ultimately repositioned a significant portion of the company's legacy debt into equity, and in 2005 the Pool led a recapitalization initiative that restored the company's financial strength and created the flexibility to grow the company and generate value for its shareholders."

"So from 2000 to 2005 we did some pretty heavy lifting and we, against all odds, rose to the challenge. The employees, the participants and the supporters in the countryside really pulled together and did something that would be difficult to repeat by anyone."