By Allan Barber*
It’s taken a long time to finalise, but at last the details of Silver Fern Farms’ capital raising are public knowledge.
The deal was announced to staff first thing today (Tuesday) followed by a press conference at which chairman Rob Hewitt gave a full explanation of just what has been agreed with new partner Shanghai Maling Aquarius, one of China’s largest meat companies and a 58% subsidiary of government owned Bright Foods Group.
SFF has committed to gaining at least 50% shareholder approval at a special general meeting on 16th October, although this is not a legal requirement, before seeking OIO and Chinese regulatory approval. The reason for gaining approval from shareholders is, as Hewitt put it, failure to do so would risk ‘waving goodbye to a lot of livestock suppliers.’ It appears this might already be happening in parts of the country where other processors claim to be being asked to slaughter livestock from traditional suppliers of SFF.
There is no doubt the extended period of uncertainty surrounding the company’s long term future has led to an exodus of suppliers, although other factors, such as SFF’s plant closure schedule coinciding with an unusually long season, may well have contributed to this. The company has been making very positive noises about its improved profit performance this year which doesn’t suggest too much market share loss.
Under the terms of the deal announced today, Shanghai Maling will inject $261 million of new equity into a partnership with Silver Fern Farms cooperative for a 50% shareholding in the business which is valued at $311 million. This is equivalent to a share value of $2.84 compared with 35 cps when trading was suspended in July. Of the new equity, $204 million will be used to pay down debt, $35 million will be applied to payment of a special dividend of 30 cps to ordinary and rebate shareholders, $5 million will redeem supplier investment shares and $17 million will be for future use.
On completion of the deal, SFF will have no debt which is essentially the outcome the company and its bankers have been striving to achieve. In Hewitt’s words the newly cash rich position will turbo charge the growth strategy and enable the company to invest in its operations. It also intends to pay out 50% of the cooperative’s profit in dividends.
The partnership is not just about the money, but also about aligned values with both parties convinced of the value added plate to pasture brand strategy that SFF has pursued for several years now.
Shanghai Maling owns 800 supermarkets in China as well as being part of a much larger group which SFF will be able to leverage as a key plank in its China growth strategy. There is however no exclusivity implied in the deal which means SFF can continue to service all its customers according to their ability and willingness to pay the quoted price.
There has been a great deal of farmer unrest during the long wait for an announcement, although the complicated nature of the agreement will surely explain the need for silence until the conclusion of the deal. Hewitt and other SFF directors are faced with a challenge to get out and explain the benefits of this deal to their farmer shareholders, more precisely how the cooperative structure is retained under the 50/50 partnership and how they will continue to retain ownership and control of their company.
At this early stage of trying to analyse the deal and uncover any fishhooks, it is difficult to see what the downside is for Silver Fern Farms and its stakeholders.
After all, the banks get paid out, suppliers receive competitive livestock payments and dividends, staff retain their jobs until or unless any closures occur, and the existing unprofitable and under-capitalised cooperative company receives new equity in return for half the ownership.
There will be those who lament the loss of 50% equity, but realistically Shanghai Maling has replaced the Australian owned banks and equity capital is cheaper than debt.
My question would be exactly how much does the Chinese partner get out of the deal, but the Chinese have always taken the long view.
We should take this as an indication of the long term value the overseas partner can see in the New Zealand red meat sector and be extremely pleased New Zealand will continue to own 50% of the business.
It looks like a pretty good deal to me.
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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ».
20 Comments
No downsides? That depends on whether you're balancing short-term gain with long-term advantages.
It's very good for the banks. They're immediate beneficiaries. For them, it's no different from Crafar - a debt-laden, wobbly enterprise taken off their books.
It's certainly good for Shanghai Maling Aquarius and, via its owners, good for the Chinese government, the Communist Party. These will be medium- and long-term beneficiaries. We'll see, I warrant, that the 50-50 agreement has a medium-term horizon, and control will pass to the stronger partner.
How good for SFF? Certainly very good in the short term, in getting it out of a ditch. But we need more than short-term views when it comes to New Zealand's agricultural future, and thus our economic and social futures.
The Chinese are the only ones in this who have a long-term view.
And once there's no opposition....? The sellout of control of the value chain would be a short sighted disaster that future generations of farmers would pay for. From my discussions with neighbours there is plenty of resistance to this so it will be interesting to see if the company PR machine, aided by the likes of Allan Barber who has no skin in the game, will prevail.
....the Chinese govt will rightly want to feed their own people first. Will they really be interested in developing other markets aside from China? Over time we will have one monolitihic meat buyer/processor supplying just the one one market. They will be price setters - take it or leave NZ.
I may have no skin in the game, but this allows me to comment objectively without being swayed by personal interest. I have never been part of Silver Fern Farms' PR machine and have often been critical of the company.
What people seem to be utterly incapable of recognising and understanding are some key facts about the meat industry:
- farmers are generally free to decide where to send their livestock;
- meat plants are not worth their cost of construction but their value based on throughput;
- the highest paying markets will ultimately get the product, whether European, American or Chinese;
- Silver Fern Farms was available to a whole range of investors in spite of its profit performance over may years (ever since it took Richmond over in a hostile takeover), but the Shanghai Maling deal was miles ahead of any other;
- Shanghai Maling can't physically remove the assets from NZ or replace all workers with Chinese staff;
- This deal is no different in principle from the acquisition of a majority share of PGG Wrightson by Agria or Japanese majority ownership of ANZCO except that this is a 50/50 partnership and there are safeguards in the structure.
My suggestion is that contributors to www.interest.co.nz should take a deep breath and consider the facts instead of the emotional aspects of this. Winston Peters would be proud of you!
Allan Barber
Nor do I have skin in the game, Allan. But I am aware of competing national interests and have the opportunity to see these rationally as they play out at high levels in many sectors.
The sorry history of SFF is not the point, nor the physical impossibility of land relocation. The fundamental local issue is an often desperate need for capital in a sector half-blinded by debt. Debt pressures reduce immediate options, as they obviously also close routes for longer-term thinking. For China, the coldly rational calculation is to protect its stability via, in one strategy, the securing of food supply. Henry Tull has focused on just this policy in a story elsewhere.
The further point is that China is no longer willing to purchase its food supplies at any price. As I mentioned elsewhere, the same strategy is being played out in every other global commodity sector. First, secure the sources of supply. Then, exploit these sources of supply - which means, among other things, exercise its influence over costs and thus price.
Two more points. New Zealand's relationship with China is wildly asymmetrical. We are politically highly intimidated by China and we look to it for rescue of our commodity economy - not to build non-commodity sectors but, in a similar role to any colonial power, to support what we have.
Second, 50-50 agreements in any business, for well-understood reasons, very seldom last long. In almost every dimension in this crucial issue of New Zealand agricultural prosperity we risk sacrificing long-term advantage for short-term needs.
These are not emotionally charged points. They are among the calculations taking place in major board-rooms and government departments around the world. Dragging Winston Peters into your rebuttal, though we would miss him on the national stage, diminishes the quality of your points.
Hello WM
I accept that I should have resisted bringing Winston into the argument! I also accept your points about NZ's subservient attitude to China and the problem with 50./50 JVs. I suspect the latter will last as long as SFF maintains profitability, not guranteed in the meat industry, and accumulated losses don't distort the balance of power.
However I don't believe SFF is a jewel in the crown for reasons stated and we should be grateful an external entity is willing to invest an unrealistically high amount of money in it. Farmers still have choices.
I fully agree with the decision to block the sale of Lochinver Station, as it doesn't pass the test, but struggle to see why the OIO was prepared to allow it and the responsible Ministers had to override their weak decision.
Your reflections are stimulating, Allan, and debate is most valuable.
SFF is no jewel in the crown, but it is one counter in a larger game. Farmers, fortunately, do still have choices.
And choices are the key issue here. As I've learned to believe, business is about choices, and to look at it in this way, business is actually very simple. When you're making money, you are gaining choices. When you're losing money, or if your debt is building unsustainably, your choices will be fast disappearing.
My concern is that businesses like SFF are - though not completely so - microcosms of the New Zealand economy. And I do not wish to see our national choices reducing or at risk of disappearing.
Agreed SFF is one counter in a larger game... and its about choices..
Consider this view
http://www.agrimoney.com/news/china-makes-another-cattle-ranch-purchase…
China chalked up another land acquisition in Australia, as Fucheng Group purchased a 31,000-hectare cattle property at a price which exceeded market expectations – and the threshold requiring the deal to require government clearance. "The feeling was that it would got for a much smaller price than that."
note the bidding activity of the former state-owned textle machinery group Rifa
In March, Hailiang Group, seeking direct access to Australian beef to put on the shelves in its Chinese supermarkets, spend Aus$31.5m on the Hollymount cattle station in southern Queensland, and paid a further Aus$10m for a cattle and cropping property nearby.
and
The scramble for Australian ranchland continues apace, as Australia's richest person buys into the market just days after Chinese officials opened up the floodgates to Australian live cattle imports.
http://www.agrimoney.com/news/mining-mogul-joins-australia-ranchland-sc…
Someone over morning tea suggested the effectiveness of the money being put up for SFF, when you consider the leverage it gives over stock numbers/units of protein, when compared to the cash put into these grazing properties is massive for the buyer/funder.
smh :(
Perhaps it's like a card game, Henry. Businesses, like players, pick up a card when it's available, if it seems to fit an intended possible hand. A couple of things are sure. The players across the table are taking part in a determined national strategy. And they know what cards New Zealand is holding - everyone knows them - and they're not great looking.
Choices?
Looking from the outside in one is struck by the absence of critical thinking (right across the spectrum) which is (largely) driven by the level of detail (that isn't) available in the public domain
It is quite apparent in many of the issues of the day an event occurs (such as an offshore investor in SFF) followed by a brief announcement followed by a plethora of views and opinions which almost fall into the conspiracy theory category with all the attendent risks and effects and mis-information
The missing element is what is the off-shore buyer buying - not the physical thing, but, the intention
The primary objective must surely be the acquisition of the rights to "brand new zealand 100% pure"
Yet New Zealand gains no "royalty benefit"
Contrast that with following 2 examples
(1) Australian States charge the large (foreign owned) export miners of iron ore and coal royalties of approximately $7 per tonne extracted from holes in the ground and shipped off-shore
(2) American companies such as Google, Facebook, Microsoft, Chevron and many others charge their foreign subsidiaries significant IP (intellectual property) fees and royalties so much it is tantamount to profit shifting, so much so that the foreign entities pay little or no tax in the jurisdiction in which the revenue is earned or generated
Several weeks ago this was highlighted here on interest.co.nz. The only response was from Xingmowang who advised that New Zealand is considering the establishment of a Silver Fern Brand (logo) for all New Zealand products - and presumably charging for its use
Well, I never knew that, and the bigger surprise was that it was Xingmowang who knew about it
So Alan Barber, the issue has much wider implications than set out here
Do you have any solutions? Do you know what is being done to address this issue?
The question is -
Can we afford to have "Brand New Zealand" in the hands of outsiders who will gather the benefit
Interesting, iconoclast, the focus on intangible assets.
These are of increasing importance as traditional, tangible sources of value decline into commoditisation - things everyone can make or do. I suspect, though, that even if it were able to be protected, the New Zealand agricultural brand is fast losing the grip it had on capturing this value.
Intangible value arises in qualities like reputation, leadership, authenticity, IP, etc. But it also concerns the entire chain from source, and this is where polluted lakes and rivers, etc, are severely damaging to the brand - let alone the country.
I understand too that Fonterra's brand qualities - seen widely as representative of New Zealand - are not so highly rated in China. The professional incompetence exhibited during its contamination scare, flabbergasting to Danone, hasn't helped.
John Key now says the '100% pure' positioning is aspirational, though we appear to do little towards realising this supposed aspiration.
So defining and capturing this value, to my mind, is no simple matter. Perhaps the Chinese will pay more attention than we have done to these premium and professional qualities in their investments here? Someone needs to.
Workingman - perhaps the Chinese will pay more attention than we have done
did you know that 20% of rural land in China is polluted or contaminated
Which means, by now, the NZ controllers of our fair land have in place a system of annual checks of these lands that are now in the hands of outsiders, rather than simply going down to the edge of the streams and creeks and saying - oops we have a problem here
Can you tell me this is being done - or is it more a case of the 3 monkeys - see no evil
Here is an example of what I mean -
Yesterday it was reported that the local founding shareholders and directors of Synlait Farms are exiting from the company and Bright Foods will move from 75% to 100% control - the local owners are in disagreement with Bright Foods who don't want to invest any more into the business (improvements?) - contrary to original promises
That can be interpreted in many ways - make of it what you will
Good point demonstrating the ... and what happened next.
However it is Shanghai Pengxin that picked up Synlait farms - now renamed, and seemed to do as you mentioned, SP are looking to move the farms or a right to the farms to Dakang Pasture - its part of the current OIO material
http://www.dakangmuye.com/
They have a New Zealand based milk product called TheLand - not clear where brand ownership resides.
Bright have a share of the Synlait factory,
http://synlait.com/products/nutritional/infant-nutritional-powders/
and Bright have a brand called Pure Canterbury - (it is not clear where ownership of the brand lies - inside or outside of NZ) - see page 48
https://doc.research-and-analytics.csfb.com/docView?language=ENG&source…
So long story short both have brands extensively described as NZ origin
Dakang has The Land
Bright has Pure Canterbury
The Bright controlled processor does not seem to pay a premium price to local suppliers compared to other processors (please correct if wrong).
and then in addition...
page 7 (of doc), top right
http://www.mengniuir.com/attachment/2015042917020100032188354_en.pdf
Launches collaborations in New Zealand to accelerate implementation of Mengniu’s internationalization strategy China President Xi Jinping and New Zealand Prime Minister John Key jointly witnessed Mengniu and Yashili signing contracts for a series of cooperative projects in New Zealand, encouraging the globalization of the dairy enterprises of both countries. Mengniu and New Zealand partners, Pengxin and Miraka, jointly launched Milk Deluxe Global Selection Pure Milk from New Zealand, which is a crucial step towards Mengniu’s internationalization strategy
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