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Third Avenue's Pick in the Food Chain

Bridget B. Hughes, CFA

Bridget Hughes: Hi, this is Bridget Hughes. I'm one of the fund analysts at Morningstar. I am here in New York at Third Avenue Management talking with Amit Wadhwaney who is the Manager of Third Avenue International Value.

Amit, you always have such an eclectic portfolio. I wanted to talk about one of the names that's in your portfolio that isn't in anybody else's, and that's Viterra. Can you give us a quick walkthrough of how you came to that idea and what you like about it?

Amit Wadhwaney: Sure. Viterra's business – and that's the really interesting part about Viterra is it's an integral part of how grain gets from farmers all the way to the end customers. Typically, a Canadian farmer grows the grain, it's stored at Viterra, Viterra will ship it on, transport it to its terminals or the ports, and from there it will be taken to the ultimate end user.

Viterra started out as a Canadian company. We initially bought Viterra after it was hit very badly by droughts. The company had to issue equity. The company was very cheap. It had great assets, a great balance sheet, and it was cheap. Now, those are three very important components for us.

Now, here was a company that's an integral part of the infrastructure that gets grain from farmer to the end customer. Viterra has, since the days we bought it, initially about 2006, has expanded to buy an operation in Australia. What the Australian operation does, it also – not only does it give it access to a different market, in Australia Viterra is effectively a monopoly in the area where it operates, where too it gets grain from the farmer all the way to the end customer.

The difference is that Australia has two other things added on to it. One, it has an operation in New Zealand, which gives it access to yet another market where it's going to be building up, which has a very large agricultural population output. And a very exciting, but a small fact of Viterra is now, post this acquisition of the Australian company, is that it is going to have a presence in Ukraine. So, as Ukraine develops as a large grain producer, you will see Viterra sourcing and delivering grain. So it's a very integral part of the grain delivery infrastructure around the world. Think of it as a quasi local monopoly, what should be a highly profitable monopoly.

Now, over the years, it's a very weather-sensitive business, which is why this acquisition in Australia mitigates some of the weather sensitivity, and then, of course, diversifying your sources of geography further with the Ukraine. Of course, as Ukraine develops, you're going to have a source of growth as well.

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Hughes: Whereas most mergers or acquisitions tend to destroy value, in this case you think the combined company is actually stronger? And then, I guess as a second question, what about the price that Viterra paid for the Australian company?

Wadhwaney: Sure. This is not the first large acquisition Viterra has made while we've owned it. Viterra bought out its largest competitor in Canada called Agricore. The merger was executed superbly; superbly have they wrung out efficiencies of a sort far in excess of what we had anticipated. That worked well.

This acquisition of ABB Grain Australia – again, this is a very different market from Canada which is where Viterra is accustomed to operating – nonetheless, presents Viterra with a sizable opportunity. ABB Grain, while a fine company, was I would say somewhat less aggressively managed than, say, Viterra was. So this presents Viterra with an opportunity, for example, improve the sourcing, improve the working capital turns, improve the cost structure of the business all the way through.

Also, given the opportunity ABB Grain presents as a staging post within Australia to grow the business, on an as-is basis, ABB was a reasonably priced acquisition. On a going-forward basis, I think ABB might, if Viterra successfully executes on its promise, be a roughly cheap acquisition.