Allan Barber says other than a white knight emerging, Alliance will have to rely on the tolerance of its bankers, more focus on costs and working capital, and praying for a substantial improvement in market conditions

A year ago Alliance announced a -$97.9 million pre-tax loss, but then-chairman Murray Taggart optimistically told shareholders at the AGM: “However, the improvements we have made to the business over recent months mean the co- operative is now fitter, more resilient and able to more efficiently deliver for our people, our farmers and our customers.” Chief Executive Willie Wiese assured the meeting “the new season has started on a much more positive note than the equivalent time last year, and despite still operating in a tough trading environment, the company is on track to deliver the expected 2024 budget outcomes.”  

Shareholders now know those statements were pie in the sky following the announcement of this year’s -$69.5 million loss before restructuring provisions and tax. The full pre-tax loss was -$120.8 million including a $51.5 million provision almost entirely made up of costs associated with the closure of the Smithfield works.

Shareholders were told they must be prepared to invest more in their cooperative by means of deductions from their livestock payments which, as noted at the time, represented appalling timing for suppliers who were struggling with declining returns from the worst market conditions for years. This programme was launched in April, effectively at the end of the season, and subsequently the level of deductions was reduced for the current season.

At the time it was obvious the new capital raised would be insufficient to repair the balance sheet and at the lower level, it will be even more inadequate. As a sobering comparison, in 2015 Silver Fern Farms sought $120 million from shareholders and actually received $22 million. Shanghai Maling then injected $267 million for a 50% share of the business, with $57 million being paid directly to the cooperative.

Hence the Alliance board’s decision to appoint Craig’s Investment Partners to explore capital-raising options, in other words to find external parties willing to invest in an uncompetitive meat processing cooperative facing a falling livestock base. In spite of Silver Fern Farms’ expression of willingness to be part of a constructive discussion, I struggle to imagine any New Zealand investor would be interested in injecting capital to preserve the company as a whole, although one or more may be willing to pick out the best bits. The banks may force the sale at a bargain price of assets capable of processing surplus ewes and lambs.

The annual report lists three options: securing capital from farmers and remaining a cooperative, selling part of the company and raising external capital, or sale of the whole company. The first option won’t happen for stated reasons and the next two are a very hard ask, given the state of the balance sheet, company performance and the declining sheep flock. The best outcome would be for Alliance’s China partner Grand Farm to see value in investing in partial ownership, similar to the SFF arrangement, but market conditions have changed considerably since 2016, both in China and New Zealand. Nor has Grand Farm shown serious interest before now, so is unlikely to change its position now.

Both new Chairman Mark Wynne and CEO Wiese express optimism in this year’s annual report that the company is “in the final stages of a significant cost and business model transformation, positioning the business for a promising future. The reset we embarked on was about a back-to-basics approach, building a stronger, leaner, and more resilient Alliance—one that is equipped to face today’s challenges while setting a course for long-term success in a competitive and evolving world.” This sounds like wishful thinking, not reality.

There is no doubt the decision to close Smithfield is a step in the right direction, although there is a suspicion it should have happened long before now. Alliance has long suffered from the reluctance of the Meat Board’s investment company Freesia, and exiting Waitaki shareholders Fletcher’s and Goodman Fielder to bite the bullet on Waitaki international in the early 1990s when, in order to avoid major writeoffs, they came up with the compromise solution which saw that company’s plants being split between AFFCO in the North Island and Alliance in the South Island. Neither cooperative had the financial resilience necessary to cope with being lumbered with ageing and uncompetitive plants in the industrial relations environment of the time.

Both cooperatives came under serious financial pressure, surviving only with the tolerance of their banking syndicates. AFFCO, saved in the nick of time by Weddel going into receivership, raised capital from external investors who were eventually bought out by Talley’s, resulting in a stable ownership determined to reinvest in the business. It is now one of the most efficient and presumably profitable companies in the industry.

Alliance successfully restructured during the 90s, assisted by Fortex’s demise, but its profit performance over the last 30 years has been patchy and its capital structure has prevented it from addressing all the historical inefficiencies of older plants and information systems. At times it has also fallen into the trap of believing it can afford to expand its overhead structure when times are good but are not sustainable in downturns.

In addition its livestock procurement practice has long favoured third party agents at the expense of loyal suppliers which indicates insufficient supply from shareholders while risking the loss of their support.

The last two years have seen revenue either less than or just over the cost of sales, while overheads including administrative expenses and sales and marketing costs have remained roughly the same. Interest cost rose last year by nearly a third as a result of the loss and this year is likely to be even higher. Over the same period equity has fallen by a quarter and current liabilities have increased by $45.5 million or 12%.

None of this makes for a compelling investment proposition for an outside investor, unless it is determined to gain a strategic stake in the New Zealand red meat, primarily sheep meat, industry. Unfortunately, in the present environment the only logical owners of the business are the current shareholders who won’t want to spread their on farm risk into buying into their processing facility when there are other options available.

Other than a white knight emerging from left field, the company will have to rely on the tolerance of its bankers who will demand much more focus on costs and working capital, while praying for a substantial improvement in market conditions.

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