Allan Barber - Alliance's cliff edge shareholder vote

The announcement of the successful negotiation with Ireland’s Dawn Meats to inject $250 million for 65% of Alliance is the culmination of a six month search for equity. But it may prove to be the easier part of the exercise. The process of persuading the shareholders to part with a majority share in their cooperative won’t be easy, therefore a Yes vote is not a foregone conclusion.

Chairman Mark Wynne is clearly pleased with the outcome of the capital raising, telling me Dawn Meats is a credible investor and very aligned with Alliance in its objectives and strategic ambitions. For Wynne the most satisfactory aspect is the fact the board has fulfilled its duty to its stakeholders to present the facts to a range of targets and obtain the best offer possible for the business.

He recognises there will be a broad spectrum of views on what the board has achieved, but ultimately the decision to accept or reject the proposal will be up to the farmers.

However last year when the shareholders were faced with putting up the money themselves, the response was so negative the proposed deductions from livestock payments were dropped. Admittedly market conditions were completely different from today. The one certainty is the banks’ insistence on repayment of about $200 million of short term debt which can only come from one of two sources – Dawn Meats or shareholders.

Dawn Meats have signed a binding offer subject to two conditions: the result of the shareholder vote and Overseas Investment Office approval. The company conducted a very detailed due diligence and, while several interested parties withdrew because of the state of the industry and livestock trends, it has remained firm in its desire to proceed.

Wynne said Dawn Meats likes the way Alliance has turned its business around in the last twelve months following the Smithfield plant closure, operating off a much lower and more efficient cost base with a good balance between capacity and livestock supply. The major obstacle holding Alliance back now is what Wynne terms the ‘backpack of rocks’ of $200 million debt.

Alliance also conducted a rigorous due diligence study of Dawn Meats’ business in reverse with the result the prospective partners are confident of their strategic alignment leading to longer term benefits for both parties. Dawn Meats sees Alliance as stronger in lamb, while it is much stronger in beef, as well as having greater capabilities in efficient use of energy and water. The companies have a very good geographical fit, complementing each other in their different areas of strength.

Under the proposed new ownership structure the board would comprise five directors, three from the majority owner and two from the 35% cooperative shareholder. The board of the cooperative, scheduled to receive $40 million from the investment, would elect three farmer directors and two independents. Any two of those would be appointed to the main board. From a management perspective, it would essentially remain business as usual with the new board signing off on future changes of strategic direction.

There is now a two month period until the shareholder vote in mid-October which will be taken up by preparation of the scheme of arrangement document and independent report for presentation to shareholders. These documents are legally binding and must be approved by the Takeovers Panel and the High Court before being circulated to shareholders who will have the opportunity to study them carefully and attend roadshow meetings.

The shareholder vote at a Special General Meeting must clear two high hurdles: 75% of all votes cast must be in favour and all Yes votes must represent a minimum of 50% of the total shareholding.

So the big questions to be answered are whether the shareholders will be willing to accept the sale of majority ownership of their cooperative and, if not, will they stump up an average of about $50,000 each to retain ownership.

Alliance shareholder and former chair of Beef & Lamb NZ Andrew Morrison told me he has great respect for what Mark Wynne and the board have achieved in their negotiations, but wants to study the scheme of arrangement carefully before deciding how to vote. He said Dawn Meats have clearly seen value in Alliance that others have not and, if that value is there, he hopes farmers will feel strongly enough to retain ownership of their cooperative.

It would still be an uphill battle to get enough shareholders to commit to anything approaching the minimum the banks would accept. But if there were sufficient voters unwilling to accept loss of control and ownership after nearly 80 years as a cooperative, this would potentially derail the scheme of arrangement.

That would leave Alliance in the worst of both worlds without approval to proceed with Dawn Meats or enough capital to appease the banks.  According to the company’s press release, the board would then be obligated to enter a process which may involve asset sales, further plant closures and cost reduction initiatives.

Total closure would be a distinct possibility, which places a big responsibility on the shareholders to be very careful what they choose.