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Ruralco bids on Elders

Ruralco (ASX: RHL) was recently cleared by the ACCC to make an offer on its competitor and it seems likely that the company will acquire Elders’ (ASX: ELD) Rural Services business. Ruralco announced that it made an offer for the business but no agreement has been entered into and there is no certainty that a transaction will take place. However, this potential purchase has been seen a long way off.

Ruralco is cashed up and looking for ways to expand through both takeovers and organic growth. Last year, the small cap was suspected of making an offer to its struggling counterpart but merely enquired via a short confidential letter regarding the potential for a transaction to take place.

In its most recent half-year report, the company highlighted its resilience in current market conditions and despite horrible weather, made significant headway on a number of divisions including its grain business (Agfarm), farm and general insurance, water solutions and wool. All of which increased profit despite less demand for products resulting in a net loss of $496,000 for the half year to March 31. This could suggest that the company’s strategy to improve efficiency and information systems has had a positive effect.

On the other side of the equation is Elders, who has disappointed shareholders again and again. Since 2008 the company has dropped from $15 per share to a measly 9 cents. If that wasn’t bad enough, the company is still seen as expensive, with a current P/E of over 116.

Much of the problem has been put down to the company’s previous management who went too far with the expansion of non-core businesses which eventually fell through. This has made the company unprofitable for many years.

Foolish takeaway

One company has gone from strength to strength whilst the other has done the opposite. As with any agricultural company, Ruralco carries a unique amount of risk, largely from prolonged adverse weather conditions. However, the company’s ability to cope under these conditions, as seen in its most recent reports and through its bid of Elders, has reminded investors that it’s up to the challenge. Since mid-May, Ruralco’s share price has risen more than 19%.

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Motley Fool contributor Owen Raszkiewicz owns shares in Ruralco.  

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