Ebro unfazed by irrigation unease

The Madrid-based Ebro Foods, chief executive is budgeting on an Australian rice crop of about 800,000 tonnes a year-well above the 300,000t, or much less, grown in past five drought years.

Mr Hernandez, in Australia to push Ebro's sales pitch to ricegrowers across southern NSW, is so sure about SunRice's future prospects he openly admits the Spanish have bid much more than he feels the company is worth to get hold of its markets and production base.

Reaction to the Spanish pitch remains mixed among growers, with farmers curious and about why the global company is so keen to take over, and nervous about losing local control in their successful food business.

However, Mr Henandez said he had not encountered much discussion about overseas ownership, although "some growers have mentioned it".

Fast growing Ebro is the world's biggest rice processing and sales business and number two in the global pasta market.

It sees SunRice as a launching pad for its Asia-Pacific business, where SunRice is currently a prominent player.

"We're offering $600m for a very complementary addition to our business-an offer that values the company at a higher price than the earnings multiples it has achieved," Mr Hernandez said.

"Our calculations expect 800,000t of production to be maintained even with water restrictions.

"We think the figure is reasonable. I think 800,000 is a very important goal-we'd hope the industry can produce it for us."

Prior water allocations drying up in the drought, production mostly exceeded a million tonnes.

To help secure its Australian production base, Ebro would continue to support research and development into lifting rice yields, while injecting extra money into SunRice milling equipment upgrades.

"Drought has forced this company to live with a low capital expenditure situation while volumes have been low," Mr Hernandez said.

"They need new technology. Ricegrowers' needs to spend that money, and if we buy in we'll need to expend funds on changing and upgrading technology-we want to make the most of the money we spend here."

Ebro is also heavily promoting its commitment to a five year rolling price contract based on the historically solid Californian rice price, reminding growers that while recent Australian rice prices above $300/t may at the top end of overseas values, back in the 1980s and '90s local returns struggled to get to $200/t.

Mr Hernandez said the Asia-Pacific region had enormous potential and although there were emotional ties to SunRice being an Australian company, the Ebro take over made a lot of business sense in the global market.

While Spanish-based, only seven per cent of Ebro's business is actually in Spain-52pc of its activities centre on North America and the remainder primarily in Europe.

The SunRice deal "at the other end of the world" would enable organic growth further afield.

Ebro recently bolstered its war chest by selling its Puleva dairy division for 555m euro and is poised to declare E270m in earnings before income tax and amortisation (EBITA) for 2010.

Although it has only just wrapped up a E195m ($262 million) purchase of the rice division of another Spanish food business (SOS Corporacion Alimentaria) and may take a 10 per cent stake in that company too, Ebro insists it has no debt, cash to spare and up to $1.2 billion in credit available if needed.

Ebro is offering grower shareholders a $50,000 for their single A-class share and $5.025 for listed B-class shares-a big premium on the last traded price of $1.60-plus franking credits of 60.3 cents a share.

It needs 75pc approval by A-class shareholders to achieve its takeover goal.

Mr Hernandez said Ebro, with annual earnings of about $2.5b, would offer every assistance for Australian growers to reinvest some of their payments in the Spanish company if they wished to remain part of the bigger rice business.

He said a merger or joint listing with SunRice had been considered, but ruled out in favour of a full takeover because of the size difference between the two companies and their different operating synergies.