Paul McIntyre: Burns Philp move fills credibility gap

Graeme Hart is rekindling a few Australian memories from the entrepreneurial 80s with his prolific and complex deal-making escapades.

Although many of those credulous cowboys went up in a puff of smoke, Hart's latest Australasian food play is being viewed with some credibility.

Burns Philp's shares touched an eight year-high on Thursday but have traded for a long time at a discounted price-earnings multiple to their food and beverage peers primarily because of the Hart factor.

Market jockeys have long fretted about Hart doing another highly leveraged, risky deal which punts more than they want to place. Burns Philp is currently trading at around an 8.5 price-earnings multiple, half that of the snack and beverage group, Coca-Cola Amatil, for instance.

But the planned listing of a combined New Zealand Dairy Foods with Burns Philp's food business by year's end is convincing some twitchy investors to lighten up on the company and even Mr Hart.

"We always thought there's a discount in the Burns Philp share price which was to take into account Graeme Hart going out and doing some enormous deal, like an offshore acquisition," said Charles Dalziell, MMC Asset Management's portfolio manager and Burns Philp's second largest shareholder. "This shows he's out there to realise the value in Burns Philp. That discount should now disappear."

The Hart factor is further diluted when market conjecture is swirling, as it is, that Burns Philp already has a trade buyer lined up to buy the snackfood division, which will stay with Burns Philp and not be part of a born-again Goodman Fielder float.

The name on many lips is Nestle and the price is around A$1.2 billion ($1.32 billion). Some say up to A$1.5 billion. The snackfood group contributed A$118 million in earnings before interest, tax, depreciation and amortisation to Burns Philp last year from sales of A$513 million. So while it only accounts for roughly 30 per cent of the old Goodman business, it has the best growth outlook.

It's still rather hazy as to whether Hart and Degnan want the snack division to develop it or flog it. When asked this week whether Burns Philp already had a trade buyer lined up for the iconic Australian Uncle Tobys group and Bluebird in New Zealand, chief executive Tom Degnan was as clear as mud.

"We have over the last three years had inquiries on just about all of our businesses from trade buyers," he said. "We've chosen to package the business the way we've packaged it for a variety of reasons."

If indeed a trade buyer is in the wings for the snackfood division, it begs the question: what does Burns Philp have left and what is it going to do now? It will have a stake in the newly listed Goodman Fielder - the market consensus is for 30-40 per cent at this stage - but after that it's looking pretty thin.

Burns Philp has been on a global hunt in the past year for a "transforming" deal but it hasn't uncovered anything it's comfortable with.

So while much of the transtasman focus for the rest of the year will be on Goodman Fielder's listing and Hart's ongoing Carter Holt Harvey play, Burns Philp will effectively be a cash box ready to flap open. Hart and Degnan will have plenty of firepower at their disposal and both men are not keen advocates of "lazy balance sheets" as one observer said this week. Any underperforming companies in this region probably should be nervous.

Certainly Degnan says Burns Philp is still on the hunt for acquisitions in Australasia and North America. It's just finding the right target. There's more action coming your way courtesy of what the market thinks is an increasingly credible cowboy, Graeme Hart.