Govt Ministers again approve Shanghai Pengxin's purchase of Crafar Farms, following revised Overseas Investment Office recommendation

Government Ministers have again approved Chinese company Shanghai Pengxin's bid to buy the 16 Crafar Farms, following a revised recommendation from the Overseas Investment Office.

The revised decision, replacing initial approval given in January, enforces a more stringent set of obligations on Pengxin. It must now invest at least NZ$16 million upgrading the farms and protecting environmental and heritage sites, up from NZ$14 million imposed initially.

Pengxin is now set to enter into a joint 50/50 venture with state-owned enterprise Landcorp, which will run the farms. The farms will initially supply Fonterra while Pengxin looks to secure an agreement with a local milk processor, which could be Fonterra itelf, to process products including baby formula, cheeses and ice cream, to sell to the Chinese market.

Landcorp is set to receive about NZ$4 million annually for its management of the properties.

A rival bidder for the farms, a New Zealand consortium led by merchant banker Michael Fay, and which took the OIO to court over its initial recommendation, immediately attacked the decision. It did not say whether it would appeal the latest decision.

Land Information Minister Maurice Williamson, and Associate Finance Minister Jonathan Coleman, made the announcement that Pengxin's subsidiary Milk New Zealand Holding would be allowed to purchase the farms on Friday.

This is the second time Pengxin has been given approval to buy the farms, after initial approval was overturned by the High Court, which ordered the OIO to reconsider its decision under a more stringent set of criteria.

It is believed Pengxin will pay about NZ$210 million for the farms.

The Crafar farms were tipped into receivership by lenders Westpac, Rabobank and PGG Wrightson, who were then owed about NZ$216 million, in October 2009.

The farms' receiver, Brendon Gibson of KordaMentha, was not immediately available for comment.

Conditions raised

“New Zealand has a transparent set of laws and regulations around overseas investment,” Williamson said in a media release.

“Those rules recognise the benefits that appropriate overseas investment can bring, while providing a range of safeguards to protect New Zealanders’ interests. They are applied evenly to all applications, regardless of where they are from," Williamson said.

“We have sought to apply the law in accordance with the provisions of the Overseas Investment Act and the guidance of the High Court," he said.

“We have carefully considered the OIO’s new recommendation. The OIO sought advice from Crown Law and independent legal advice from David Goddard QC. The Ministers also sought advice and clarification from Mr Goddard. We are satisfied that on even the most conservative approach this application meets the criteria set out in the Act and is consistent with the High Court’s judgment.”

Coleman said the consent came with stringent conditions.

“These 27 conditions have been imposed to ensure Milk New Zealand’s investment delivers substantial and identifiable benefits to New Zealand,” Coleman said.

The conditions require Milk New Zealand to invest NZ$16 million into the farms and to protect and enhance heritage sites. That is up from the NZ$14 million Milk New Zealand was required to invest in the OIO's initial decision.

“The combined effect of the benefits being delivered to New Zealand as a result of this transaction is substantial,” Coleman said.

A copy of the OIO’s new recommendation is at: http://www.linz.govt.nz/sites/default/files/docs/overseas-investment/oio-recommendation-crafar-farms-20120420.pdf

A copy of the OIO's decision summary is at:  http://www.linz.govt.nz/sites/default/files/docs/overseas-investment/decision-summary-201110035.pdf

Long time coming

After spending nine months at the Overseas Investment Office, Pengxin's application to buy the farms was initially approved in January this year.

However, a rival bidder for the farms, a consortium of New Zealanders led by merchant banker Michael Fay, challenged the OIO's judgement in the High Court. Fay's group, called the Crafar Farms Independent Purchaser Group (CFIPG), had bid NZ$171.5 million for the farms, well below Pengxin's rumoured bid of around NZ$210 million.

In February the High Court upheld the appeal. Justice Forrest Miller ruled the OIO had not applied the economic benefits test in the Overseas Investment Act correctly, and ordered the decision to allow Pengxin to buy the farms be set aside and reconsidered under a more stringent set of criteria.

Pengxin had to demonstrate that the economic benefits stemming from its purchase would be substantially and identifiably more than what would be expected if a hypothetical New Zealand buyer purchased the farms. The offer price would not be part of the consideration.

The OIO initially said it would make its revised decision in just a matter of days. However, it has engaged heavily with Crown Law over its second recommendation in an attempt to ensure it has applied the Overseas Investment Act in accordance with Justice Miller's interpretation.

They gave their revised decision to government ministers Maurice Williamson and Jonathan Coleman at the end of March. Williamson and Coleman then sought outside legal advice on whether the OIO's decision was in accordance with Justice Miller's interpretation before releasing the decision today. In his initial ruling, Justice Miller heavily criticised the two Ministers' decision to rubber-stamp the OIO's recommendation.

Following the High Court decision, CFIPG sent the Overseas Investment Office a list of the economic benefits it claimed would be the result of it being allowed to purchase the farms, while taking aim at Pengxin's bid.

That prompted a strong response from Pengxin, which noted no one would be holding CFIPG to its investment and employment promises, whereas under the Overseas Investment Act, its bid would be constantly monitored to ensure it met the economic and environmental criteria placed on it by the OIO.

'What we'd bring'

The Fay consortium said it would invest NZ$18 million upgrading the farms over three years, while the Overseas Investment Office had required Pengxin to invest at least NZ$14 million in upgrading the farms.

That would lead to a 25-30% increase in producticity and performance across the 16 farms, and a 15% increase in permanent staff and contractor levels, CFIPG said. That amounted to an extra 13 or 14 workers, it said in the submission. There would also be a significant level in short-term employment due to the initial capital spend, it said.

Read the CFIPG submission here.

CFIPG said it would likely continue with sharemilking arrangements on the farms, rather than employ farm managers. It also committed to environmentally responsible and sustainable farming practices, and to the protection and enhancement of historic heritage in relation to the Nga Herenga and Te Ruaki pa sites on the land, a similar promise to the one made by Pengxin.

A New Zealand purchaser would also provide on-farm training for junior employees, CFIPG said in response to Pengxin's proposal to set up an on-farm training facility.

Pengxin said in response that it would invest NZ$18.7 million for production and environmental upgrades, as well as allowing for public access to a forest park and preservation of Maori pa sites. NZ$15.5 million would be spent over the first three years, it said. In its initial approval, the Overseas Investment Office had required Pengxin to spend at least NZ$14 million on farm upgrades.

A joint venture management contract with State-owned farming company Landcorp for running the farms was likely to net the SOE NZ$3-4 million annually for its management of the properties, Pengxin said.

Pengxin also said that, unlike CFIPG, which was looking keep the farms supplying raw milk to Fonterra, it would enter into a joint venture processing operation in partership with New Zealand interests to process the milk produced on the farms into cheese, ice cream, infant formula, UHT milk and yoghurt.

Those products would be marketed in China under the "Nature Pure" and "Pure 100" brands, it said.

"Pengxin will invest at least NZ$100 million in marketing these product s in China in the first five years, building up market demand which will benefit other New Zealand exporters. New Zealand still exports more than half its milk in the form of milk powder, which others use as the raw material to create high value consumer products. We need to move up the value chain and compete with them,” Pengxin said.

"Pengxin will give Landcorp the opportunity of being involved in the management of Pengxin’s sheep breeding operations in China, also helping  Landcorp win other consultancy and management assignments in China and assisting  them in marketing produce direct from Landcorp’s farm properties in New Zealand."

Chequered past

The Crafar farms group was put into receivership in October 2009 owing about NZ$216 million to its lenders Westpac, Rabobank and PGG Wrightson Finance after interest.co.nz revealed animal welfare issues at the farms.

An initial Chinese-backed bid by Natural Dairy for the farms was rejected by the government in late 2010, which was denied on 'good character' grounds. Three of Natural Dairy's executives are now facing fraud charges.

'Not what is needed'

Following the latest announcement, Fay said the approval represented a "bad day for New Zealand," and that the sale was "simply the wrong thing to do."

“Three out of every four New Zealanders are against selling these farms into foreign ownership.”

"It is clearly not a good decision for the economy. It shows the Government has no commitment to the people who live and work in the rural sector. Sixteen dairy farms – an area the size of Hamilton - and a minimum NZ$20 million per year of Fonterra milk payouts are lost to the Central North Island economy for good," Fay said.

“This is a one way deal. No Kiwi will ever own a farm in China and that’s a fact," he said.

“Our group is disappointed and our Iwi members are justifiably angry at this action by the Government. Since September last year we have increasingly felt that the intent of the Overseas Investment Office (OIO) and the Government was to push this sale through.

“Our group was determined to make a case for a sale to New Zealand dairy farmers. We were successful in a High Court challenge to the Government’s initial approval and the Judge clearly set out the proper application of the ‘benefit test to New Zealand’ that a foreign buyer must meet. This second recommendation from the OIO and approval by the Ministers reflects nearly 12 months of to and fro negotiations between the OIO and Landcorp working for Shanghai Pengxin to get this application approved,” Fay said.

“It is hard to comprehend that this sale can go ahead only because a Government owned entity, Landcorp, has partnered with Shanghai Pengxin to provide the necessary business acumen and expertise required for OIO approval,” said Sir Michael.  Our group has always believed that this requirement cannot be met by simply buying in local expertise. This would mean that any potential foreign owner would be approved if they could ‘buy in’ sufficient New Zealand expertise to effectively make a nullity of this key requirement in the OIO rules,” he said.   

“With this sale approved by our Government, and farm gates now wide open to cashed up overseas investors, just how much productive land will go to offshore ownership?  Sadly the continuing loss of our productive land is going to be an extremely high price for the farming industry and the country to pay.”