S&W Seed: Another big acquisition drives SANW to number one worldwide.

By Ian Gilson, CFA

On March 17, 2013 S&W Seed (SANW) announced that it has agreed to purchase Seed Genetics International (SGI) of Unley, Adelaide, South Australia. The deal is scheduled to close in early April 2013, in time for S&W Seed to capture most of SGI's 2013 seed production. The combined companies will be the largest non-dormant alfalfa seed producer in the world.

The terms are for 865,000 shares of stock, $5 million in cash and a $3 million promissory note. SGI had revenue of AUD$18 million in the 2012 fiscal year ending June 30, 2012 with pretax income of $1.6 million (8.8% pretax margin). Due to bad weather the company sold 5.5 million pounds of alfalfa seed in fiscal 2012, well below its average of 8 million pounds over the past few years.

SGI has access to over 32,100 acres of land of which nearly 70% is under irrigation and the rest has a reasonable rainfall in most years. 75% of the acres are used to grow alfalfa and the rest is mainly under clover (which is also used as bovine and equine food although care has to be taken with clover since certain varieties under certain conditions can be toxic to cows and horses). In fiscal 2013 the overall average price for all seeds combined was AUD$3.27/#, well below the nearly $4.50/# realized by S&W Seed. However, SGI's cost of production is materially lower than S&W's California cost of production.

SGI has a market share of about 60% of Australian seed production and also has access to seed produced in the US, South Africa and Europe. The company has significant sales in South America, where S&W Seed has a minimal presence. The acquisition is expected to be immediately accretive to S&W's earnings.

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