MELBOURNE, AUSTRALIA — If the proposed merger of two Australian bioplastics companies goes ahead, the new company will be called Secos Group Ltd. and have annual sales of about A$27 million (US$21 million).
Melbourne-based, publicly listed Cardia Bioplastics Ltd. plans to merge with Melbourne-based, privately held Stellar Films Group Pty. Ltd. Stellar is the larger party in the deal, with current annual sales of A$21 million (US$16.3 million).
But an independent financial analysis of the merger says it is “not fair” for Cardia's shareholders, however, it is “reasonable.”
Cardia shareholders meet next month to vote whether to finalize the deal. The meeting, originally scheduled for March 17, has been postponed to April 7.
Documents filed with the Australian Stock Exchange (ASX) said Secos is an acronym for “sustainable eco solutions.”
The merger will include Stellar Films (Malaysia) Sdn Bhn, which operates a plant at Port Klang, and Stellar's 50.8 percent interest in a Malaysian-based joint venture, Akronn Industries Sdn Bhd, which manufactures silicone-coated paper and film products at a plant in Nilai.
Melbourne-based chartered accountancy firm Nexia Melbourne Pty. Ltd. was commissioned by Cardia to advise its shareholders on the merger proposal, as required by Australian law.
Nexia's report said it judged the merger offer to be “not fair” because Cardia shareholders' value in the new company is diluted from 100 percent to 45 percent, so they will no longer have control.
Although Nexia said its finding does not consider any “uplift in” value of the integrated business through operating cost synergies; shared production, distribution, marketing, facilities and personnel; access to markets and customers; enhanced intellectual property; access to funding; and the ability to use Cardia's “significant tax losses.”
Once those are considered, Nexia said the proposal is “reasonable” for Cardia shareholders.
The ASX documents reveal more about Cardia's previously announced plan to exit its Brazil film and bag-making operation, despite establishing it in only September.
Nexia said an equipment finance loan for the Brazilian operations will be paid out from “proceeds from the sale from discontinuation of this plant.”
It said Cardia invested almost A$1.5 million (US$1.2 million) in plant and equipment in the half year to Dec. 31, 2014, of which A$663,000 (US$ 515,000) was for the Brazilian plant.
During the half year, the Brazilian operation lost A$910,000 (US$707,000), comprising A$480,000 (US$373,000) in operating losses and A$430,000 (US$334,000) in impairment losses on inventory and plant and equipment.
Cardia managing director Frank Glatz, in response to Plastics News' query about the fate of the Brazilian plant, said: “We do not own the factory. It has been rented. We could just hand back the lease. No problem.”
He did not respond to a question on when the lease will expire.
If the merger proceeds, Secos plans to raise A$3.5 million (US$2.7 million), using A$1.5 million (US$1.2 million) for working capital to buy raw materials; A$300,000 (US$233,000) for technology development and patents; A$1 million (US$778,000) for operating expenses; and A$700,000 (US$544,000) on capital expenditure to expand film extrusion and bag making activities.
Cardia chairman Richard Tegoni said in the ASX documents the merger will achieve economies of scale. For example, Stellar's Deer Park, Melbourne, cast film plant can produce as much hygiene film in three weeks as Cardia's hygiene film extrusion lines can produce in a year.
He said the group's “complementary fit and potential synergies” are particularly evident in the Malaysian market. Stellar is already a well-established manufacturer with its own production plant in Port Klang and Cardia can establish a finished product plant within Stellar's facilities to save set up and running costs.
“Stellar's expertise will also be applied to Cardia's Nanjing, China, production with the aim of fast tracking manufacturing efficiency improvements,” Tegnoni said.
Stellar manufactures cast films for the personal care, hygiene, pet care and medical product industries, including embossed barrier, laminated, multi-layer, printed and general packaging films.
It sells cast films to its Akronn joint venture that silicone coats the films and markets them as film release liners to the personal care, hygiene, photo voltaic and graphic arts industries.
Cardia was established in Melbourne in 2002 and has plants in Melbourne and Nanjing, China.