AUSTRALIAN Agricultural Co's largest shareholder, IFFCo, has flagged its interest in purchasing the Kilcoy export abattoir, confirming that it has entered into due diligence with current owner Harmony Group, of Singapore.
If it proceeds with the purchase, IFFCo would effectively act as a custodial owner of Kilcoy until AA Co's own strategic review of operations is completed.
IFFCo's representative on the AA Co board, Arunas Paliulis, explained after Friday's AGM that should the deal go ahead, Kilcoy would be acquired by IFFCo under what is called an assigned put-and-call option.
That would allow a later transfer of ownership of the asset to AA Co, assuming the new AA Co board and management approved the acquisition and the broader move into meatworks ownership.
"But until the AA Co process can come to fruition, IFFCo would prefer that the asset be considered on its merits while it is available, rather than perhaps missing the opportunity," he said.
It is unclear what future would lie ahead for Kilcoy if the AA Co board decided against a business extension into processing.
However, IFFCo, in its own right, is a large international player in red meat processing, killing about 10,000 buffalo daily at its plants in India.
At this stage, there is no indication that the company has any designs of its own on long-term processing ownership in Australia.
As part of its long-term strategic plan set out in 2006, AA Co stated a desire to "explore downstream activities, including cost-benefit studies of owning a meatworks as an adjunct to its growing branded beef business".
A successful acquisition of Kilcoy would provide AA Co with long-term processing security, and would further tighten the company's food safety and product integrity credentials through the control of all stages of the supply chain.
Currently, the company utilises a service kill provided through Stanbroke Beef at Grantham, with occasional Wagyu kills at Casino.
One of the possible downsides seen in any purchase by IFFCo/AA Co of Kilcoy is a potential decrease in competition for quality grainfed slaughter cattle in the marketplace.
Kilcoy has based its business in recent years on grainfed cattle, providing strong marketplace competition against larger players like Swift and Teys.
If a large portion of Kilcoy's killing capacity is now lost to a dedicated kill of AA Co cattle, that competitive element may no longer exist, critics say.
However, sources within the AA Co camp suggest the company might expand killing operations at Kilcoy, and maintain the current kill of 'outside cattle'.
AA Co last financial year turned off about 200,000 slaughter cattle, with an increasing proportion of those retained within the company's rapidly growing branded beef programs, now worth about $100m annually.
The Kilcoy plant has a current kill capacity of about 570 head daily, in a single-shift, seven-day operation.
The company's throughput in 2007 was about 54,000 tonnes carcase weight, accounting for about 160,000 cattle.
During last week's AA Co AGM, Mr Paliulis stressed that his company had no intention of entering into direct trading relationships with AA Co.
"We want to avoid any semblance of suspicion of related party transactions between the two companies," he said.
"What we hope to do is simply pass on our contacts, expertise and access to facilities and markets to AA Co, so they can do it for themselves."
Asked whether that business relationship could change at some future time, to the potential advantage of both companies, he said that would only happen if it could be ensured to everyone's satisfaction that clear arms' length transactions could occur.
"There may be some inevitable overlaps in marketing activity, but we would prefer that AA Co and IFFCo act in their own names."
He said at this point, IFFCo had no particular designs on increasing its current 19.9pc stake in AA Co.
"In the distant future it's a possibility, but for now, it's not an issue. We've just arrived: we want to get a good feel for the company, its capacity and its resources."
"What we're currently concerned with is capital raising. If all current shareholders are willing to participate, then we would like to participate also, but to no more than our relative 19.9pc stake. That would simply maintain our current shareholding."
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