How much juice can you squeeze out of an orange?

That’s how OJC shareholders who have followed the company’s turnaround over the past three years have felt.

But now OJC is at the heart of a newly formed company that will generate $400 million in revenue and $29 million in EBITDA.

The new combined company will operate under the ticker symbol SPG and will be valued at approximately $280 million at $1.50 (the current raise price).

Given the importance of the brands and personalities involved – including OJC Chairman Jeff Kennett – this news made headlines in mainstream Australian media.

The merger takes place with the three key brands OJC, SPC and Nature One Dairy.

These are the markets in which the companies will now operate:

For FMCG companies, size matters and economies of scale are the best way to reduce costs in the face of rising inflation.

Instead of three purchasing managers, there will be one.

Instead of three board members, the group will have one.

etc…

For companies that rely on economies of scale, bigger is better.

For OJC, this deal makes sense as the costs can now be absorbed by a larger organization and improve efficiency across the company.

The key question is: Was this a good deal for OJC shareholders?

After the consolidation, OJC will represent approximately 15.5% of the company’s total value.

Additionally, OJC will acquire Nature One Dairy and SPC “unencumbered.” This means that OJC (and the new company) will not assume the debt on their books.

After the 10:1 consolidation and $1 million capital increase, OJC’s market cap will be around $44 million.

After the acquisitions and capital increase, the new SPG company will be valued at approximately $288 million.

OJC’s share of this will be about $44 million – the same market cap after the raise.

Here are our works:

It is not entirely clear what the company’s total debt will be. However, we expect more information to emerge before the November vote.

As for the price, OJC shareholders will not receive an immediate premium increase in shareholder value. However, we expect value to be generated over time as synergies within the companies improve.

All ships rise on a floating tide.

This also enables OJC to allow larger funds looking to invest in Australian-based companies to now take a position given the market size of the conglomerates.

For these reasons, we believe the merger is ultimately a good thing for the company and shareholders.

This opinion is shared by the company’s three largest shareholders (representing 42% of the vote).

Looking at the counterfactual: What would happen if OJC doesn’t go through with the acquisition?

OJC would have to “let it grow on its own.”

Although the company and CEO Steven Cail have made excellent progress in strengthening the company’s balance sheet and cutting costs when necessary, it has faced a lot of tailwinds over the last three years.

OJC is, at its core, a turnaround story.

However, costs have increased overall since 2022.

Inflation affects all areas of OJC’s business (energy prices, wage inflation, transportation, etc.).

But perhaps the biggest challenge is that the price of oranges has risen due to poor crop yields in Brazil and Florida (orange juice futures were the highest-rising commodity in 2023 – good for traders, bad for OJC).

The only saving grace for OJC was that inflation headwinds affected everyone in the industry and it was a race for survival or acquisition.

This consolidated new company will be large and comprehensive enough to weather the inflation storm and potentially take over smaller operators that can no longer survive under these conditions.

To increase the volumes required to achieve economies of scale, OJC would likely have had to make further investments in infrastructure…

This is where SPC comes into play.

SPC has facilities in Shepperton that OJC can use to mitigate any “capacity constraints” for growth.

So if OJC were to go it alone, it would have been a long, hard road for shareholders, full of cost cutting, dilutive capital raises, and value destruction.

Growth would also have been challenging as additional capital or debt would have to be raised to improve the capacity to produce more products.

Going it alone would also have been difficult when it came to exports.

OJC would have had to develop new relationships with suppliers abroad and develop “go-to-market” strategies that introduced “sales risk.”

Nature One Dairy brings this to the table.

The company has a large presence across Asia and we believe OJC can benefit significantly from immediate forays into this market:

Although each company has its own brand and story, we think this graphic summarizes the unique value each company brings to the transaction:

Since the acquisition, Steven Cail has raised money only once, through a $5 million strategic investment from The Smith Family.

Its ability to reduce costs across the company has placed OJC in a strong position to support this merger.

It is unfortunate that the stars were never aligned for OJC to properly reap the fruits of their labor on their own. However, we believe that OJC has the best chance of gaining a strong foothold in the FMCG market in this larger vehicle.

What’s next for OJC?

The merger will be put to a vote by OJC shareholders.

It will also undertake a $1 million priority capital raise from existing shareholders.