11/01/2011

Union Agriculture Group

Union Agriculture Group

Based in Montevideo, Uruguay, Union Agriculture Group [proposed symbol (UAGR)] scheduled a $200 million IPO with a market capitalization of $717 million at a price range mid-point of $14 for Wednesday, July 27, 2011. The full IPO calendar for the week of July 25th includes 12 IPOs scheduled to raise $2 billion.

OBSERVATIONS -- UAGR is a private-equity sponsored, money losing roll-up of farm land in Uruguay. Negatives include the following: losing money, operating in a foreign county with an unclear legal structure, UAGR itself is based in the British Virgin Islands.

In addition, “Substantially all of UAGR’s land is held under promesas, pursuant to which UAGR expects to receive title at a later date,” which is obviously a weird way to do business.

UAGR expects to use the IPO proceeds primarily to acquire additional to increase landholdings in Uruguay to 160,000 hectares.

CONCLUSION -- There are better ways to make a less risky food shortage, inflationary hedge, which is what UAGR appears to be.

UAGR Valuation Metrics

BUSINESS -- UAGR is one of the largest corporate agricultural landholders and operators in Uruguay and a leading producer of agricultural products for export to the global market.

UAGR has grown rapidly since formation in 2008 and has fully paid for and acquired approximately 84,670 hectares of agricultural land in Uruguay for operations. Substantially all of UAGR’s land is held under promesas, pursuant to which UAGR expects to receive title at a later date.

Diversified agricultural operations include crops (soybeans and wheat), rice, dairy, cattle, sheep and other products (blueberries and honey).

NOT A US DOMESTIC COMPANY -- Union Agriculture Group Corp. was incorporated pursuant to the laws of the British Virgin Islands. The company’s legal name is “Union Agriculture Group Corp.” Union Agriculture Group Corp. was incorporated on January 2, 2008 and is incorporated for an indefinite period.

COMPETITION -- Although UAGR is one of Uruguay’s leading agricultural producers, due to the highly fragmented nature of the farming sector, UAGR’s overall market share with respect to some of the products produced is insubstantial.

With respect to farmland, UAGR is not aware of a significant number of companies that have been actively competing to acquire farmland in Uruguay on a large scale in the last 10 years. However, UAGR believes that new companies, some of them international, may become active players in the acquisition of farmland and the leasing of sown land, which would add competitors to the market in coming years.

PRE-IPO SHAREHOLDERS % -- Pre-IPO UAGR is 52% owned by private equity funds: . Wellington Management Company, LLP, 18%; Columbia Wanger Asset Management, LP, 12%; Sprott Resource Corp., 9%; Agrivent, 7%; FCPR Ice Opportunity IPO, 6%

USE OF PROCEEDS -- UAGR expects to net $185.5 million from its IPO. IPO proceeds are allocated to the following:

To repay borrowings, if any, outstanding under a subsidiary’s $10.0 million line of credit with Banco Itaú Uruguay S.A.,
To acquire additional farmland, consistent with the business strategy. UAGR expects to use the proceeds primarily to acquire additional land in furtherance of the objective of increasing landholdings in Uruguay to 160,000 hectares.
The remainder, if any, for working capital and general corporate purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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