If you don’t ‘farm it, you mine it’ goes the adage, which is meant to indicate the importance of agribusiness and mining to the global economy. What, though, if a single business does both?
That’s the case for Omnia Holdings, the 66-year old, JSE-listed company that, despite the importance of its positioning, hit upon times so lean in 2019 that it drew a gasp of concern from its incoming CEO, Seelan Gobalsamy.
He joined Omnia as a non-executive director in September 2018. “I guess a few months into that the board, and the CEO at the time, asked me whether I would come and help them.
The FD [financial director] of Omnia had left and clearly there were some dark clouds on the horizon,” says Gobalsamy from Omnia’s Sandton offices in an interview with finweek.
That was in March 2019. “How dark those clouds were, I don’t think were to be revealed ... I joined pretty much a year ago as the FD and within a week of coming into the company I realised, my goodness: We’ve got a problem.”
The problem was debt incurred following a short period of expansion and diversification. Prior to that, Omina had been a net cash positive kind of company.
So, for shareholders, this was relatively traumatic, and unwelcome territory.
In fairly short order, Gobalsamy – whose previous work life had been exclusively in the financial services sector at Liberty Group and Old Mutual – set about the financial re-engineering upon which – to be honest – the market is yet to judge, based by Omnia’s share price.
He installed R6.8bn in bridging finance, effectively giving Omnia some breathing space. That was then partly replaced following a R2bn rights issue. The rump of the debt was refinanced consisting of R3bn in core debt and R1.5bn in a working capital facility; the latter, in order to service Omnia’s steep working capital cycles.
The share price has had a mixed performance in the meantime. It briefly recovered as the new year got underway, but has trended down, especially as the true extent of the coronavirus (Covid-19) became known: first as a ripple in a far-flung Chinese city until the pandemic of today.
All boats have sunk as the investment tide rapidly ebbed from world markets. Remarking on the recapitalisation, Gobalsamy says it would have been impossible to achieve today.
The Covid-19 contagion notwithstanding, two processes are now underway at Omnia. One is to further reduce the firm’s net debt. There are no shortcuts in achieving this. Gobalsamy says the plan is to cut costs, engineer in better efficiencies, and trim capex. Bread and butter stuff, you might conclude. The second process is to see whether Omnia has the right portfolio and geographic mix.
Omnia consists of three business arms. The first is the production of bulk, chemical-based fertilisers. This activity stems from the company’s origin that allowed for a natural morphing of ‘chemicals’ into explosives for the mining sector, represented by the Bulk Mining Explosives or BME brand. Thereafter the company exploited niches up and down the respective value chains of both industries.
The third arm came with the purchase of Protea Chemicals in 2004 – a decision motivated partly by concern at the cyclical nature of both agribusiness and mining. The aim was for Protea to have a smoothing effect on earnings before interest, tax, depreciation and amortisation (ebitda). However, the truth is that it’s been a problematic addition.
“It’s been inconsistent; it’s been a very difficult business to own, to lead, and to manage,” he says. New management has helped produce something of a turnaround, but it was an attempt to stabilise the business that led to the purchase of Umongo Petroleum in 2017 for R780m – one of the deals that took Omnia into its over-leveraged position.
The other acquisition was $100m for a company called Oro-Agri which specialises in organic-based fertilisers. Oro-Agri’s footprint is impressively wide: it has operating plants in Brazil, the US, Portugal (as well as the Cape’s Somerset West) that supply 30 countries to which the expanse of India was recently added. In terms of reach and footprint, Oro-Agri literally sprawls across the globe, with fingers of interest everywhere.
Here’s the rub of the restructuring process Gobalsamy says is being considered.
“We’ve got to work out what is core to us. Which ones are meeting the return on capital and which ones are not? Which countries are meeting the return on capital and which not?” The same question applies to the vast portfolio of products Omnia creates. For Gobalsamy, the ‘all’ implied in the Latin root of Omnia’s name, would benefit from the application of less.
Given that Omnia has been around for so long, it has inevitably picked up assets it now doesn’t need, especially if is to run effectively. In the case of Protea Chemicals, it might be warehousing facilities, or real estate, or plant and machinery for instance.
“The second thing is to say which of the products and geographies are not meeting the return on capital, and which won’t – and close them,” says Gobalsamy. “We need to make some decisions around that.”
The company will go into markets where there’s growth in fertiliser, or growth in the value chains in which it participates, but the decision will be scientifically tested against investment criteria, says Gobalsamy. That’s the financial services executive speaking and perhaps hints at the fact that over time Omnia has grown unwieldy, attracting assets to itself that aren’t necessarily crucial to its success.
“The core of our business is probably agriculture and mining and if we’ve got chemicals businesses that are pure commodity traders and are not delivering the return on capital that’s required, then those are businesses that must be restructured,” said Gobalsamy.
“Protea certainly needs a lot of hard work and we have a management team in there that will make good progress with that restructure.”
Omnia’s share price has been lower, but the stock took a renewed bashing in at the time of writing amid a general market Covid-19 sell-off. The pandemic is one of the things that Gobalsamy acknowledges “frightens him most” about his current role.
“If we sat here three years ago and said that in three years’ time the world will pretty much stop with the coronavirus which will be worse than SARS or swine flu or any of those ... I don’t think we would have foreseen that,” he says.
He’s also concerned by the power crisis in South Africa and, generally-speaking, the low level of economic growth in the country. “I guess sitting here today my job is to think about what the next three, five and ten years will be like so we can respond to that and respond swiftly.
“We started the discussion by saying what Omnia did last year. I guess that as a shareholder, as a customer, as a staff member you’re probably looking to the business leaders of the country to act swiftly, to prepare with what we’re facing today, as well as what’s coming,” he says.
“Watching the share price every day is not the highest thing on my agenda right now. I think the job at hand is to get the business fixed, get the business stabilised and be clear in the future direction. I think then the share price will take care of itself.”