By Allan Barber*
Since my last column when I tried to assess the motives and justification of the Silver Fern Farms shareholder group’s requisition, two interesting things have happened.
The most important development has been the Financial Market Authority’s conclusion there was nothing misleading in the company’s notice to shareholders in advance of the special meeting on 16 October to discuss the agreement with Shanghai Maling.
The second interesting event was Alliance CEO David Surveyor’s comment to the Alliance conference that company was under serious pressure from its bankers to reduce debt at the same time as global prices had plummeted. In response Alliance had succeeded in cutting its costs by $34 million with twice that amount still to come and in reducing its debt from $350 million to $120 million.
There has also been an implication MIE may be involved in the requisitioning group, although I am assured this has no foundation which is reassuring because it would be good to put the idea of a merger between SFF and Alliance to bed once and for all..
There is no evidence either meat company is any longer remotely interested in a deal which only a small rump of disaffected shareholders seems to think is a good idea. SFF is ready to move to the next stage of its development with a strong balance sheet and a new partner, while Alliance is busy implementing plans which will result in a very different looking company.
The FMA’s report on its conclusions following a review of complaints about SFF is unequivocal and totally supportive of the company’s position there was nothing misleading or deceptive about information supplied to shareholders. The FMA expresses no view on the merits of the transaction with SM, nor does it have any view on the complaint regarding the type of resolution put to shareholders. It says this is a matter between shareholders and the company.
Contrary to Winston Peters’ claims the FMA failed to get sufficient information from SFF, the Authority states it is satisfied with the access and materials provided by the directors and management to enable it to complete its substantiation of the relevant information. One outstanding question is how much detail the FMA went into in its assessment, but following the report that now appears to be irrelevant.
In discussion with CEO Dean Hamilton about the merits of the deal with SM as currently structured, he made the point very forcibly there were no acceptable alternatives available to the company. SFF had run a capital raising exercise for 10 months, during which time there were no firm New Zealand expressions of interest and the only other offers were for total control of the business. In SM’s case, it was willing to pay a substantial premium for 50% of a business which had a capital value of $100 million, based on the share price of 35 cents.
In response to Shrimpton’s claim his group has no intention of disrupting or damaging the company, Hamilton expressed his frustration. It can’t be easy to be philosophical about the situation, while SFF has to spend time and money preparing for a special meeting it considers unnecessary finding responses to the points raised and obtaining an updated review of the financials from Grant Samuel.
I asked Hamilton what the bank syndicate’s position would be if the deal were not to be completed, either in the unlikely event the OIO fails to respond before the deadline or any action as a result of the requisition. He said there is no reason to think the OIO will fail to respond, because it has always been aware of the 30 June deadline, while in the company’s opinion there is no other legal impediment.
However a default would trigger a formal review of the facility which in Hamilton’s opinion would be an extremely serious event. The current facility is in place until 31 October 2016, but would be effectively superseded by the event of review.
It is not clear whether the group of 80 shareholders are fully aware of all the potential implications if SFF defaults on the contract with SM, but they must surely recognise the risks. It seems they are on the same wavelength as Winston Peters, believing any outcome, however catastrophic, is better than shedding control of 50% of the company to a Chinese partner.
At the risk of sounding like a cracked record, it is worth re-emphasising several points to those people who object to the solution the company has chosen to address its equity problems: SFF shareholders have already had several chances to recapitalise the company and there have been insufficient takers; the meat industry is highly volatile and demands a strong balance sheet to act as a buffer in bad years; farmer ownership without a robust capital structure and appropriate capital investment cannot guarantee ownership or control of value added production; and lastly the directors would have been derelict in their duties if they had failed to conduct the equity raising programme and accept what they considered the best offer.
However, where SFF and its board is on shaky ground is on the continued claim this wasn’t a major transaction requiring 75% acceptance of the total shareholding, because clearly it involves transfer of ownership of more than 50% of the company to the new JV. This point is made very clearly in the Statement of Opposition for the special meeting.
If the shareholder group is successful in persuading sufficient shareholders to vote against the transaction, the requisitioning group would have a good case against SFF under the Companies Act.
I genuinely hope it doesn’t come to this, because such an outcome would be a Pyrrhic victory achieved at enormous cost to the company.
To subscribe to our weekly Rural email, enter your email address here.
Farms For Sale: the most up-to-date and comprehensive listing of working farms in New Zealand, here »
Here are some links for updated prices for
- lamb
- beef
- deer
- wool
Y Lamb
Select chart tabs
*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 ». This article first appeared in Farmers Weekly and is here with permission.
21 Comments
Only $100m was sort to start
Chinese state-owned Bright Food Group has agreed to invest in Silver Fern Farms in a deal which values New Zealand's biggest meat exporter at as much as $600 million, sources told Street Talk on Monday. An announcement will be made on Tuesday. It's understood the investment by Bright Food subsidiary Shanghai Maling, which is listed on China's A-share market, has been structured as a 50:50 partnership agreement. Silver Fern Farms is a co-operative representing over 16,000 sheep, cattle and deerfarmer-shareholders.
It has been seeking a $100 million capital injection to strengthen its balance sheet before banking facilities expire in October and hired Goldman Sachs last year to assess options. The Dunedin-based company told shareholders last month that it remained on track for full-year earnings before interest, tax, depreciation and amortisation in the $NZ75 million to $NZ85 million range, and that it had processed more than 735,000 cattle for the first time since 2004.
Read more: http://www.afr.com/street-talk/bright-foods-shanghai-maling-strikes-dea…
Follow us: @FinancialReview on Twitter | financialreview on Facebook
And re read this
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11552…
He says the Silver Fern Farms deal was similarly complex. Through the deal, announced in September, the Chinese company will invest $261 million for a 50 per cent stake in the Dunedin-based meat processor.
"The number of banks that rolled up to Silver Fern Farms and said, 'You can't raise capital for this business in this condition' was pretty lengthy," Barclay says. "We looked at it with a different view and said that if you do the following things we think you can and we turned out to be right."
The major transaction thing would be a massive black eye to the advisors, all.
And certainly doing something a few things different.
I don't know anyone that thinks this was not a major transaction. Goldman Sachs involvement tells you all you need to know.
Truth was farmers were railroaded into supporting this by a CEO essentially imposed on them by the banks tasked with getting their money out. Long term consequences for farmers were never a consideration. Genuine alternatives, originally facilitated by the board, were then discredited in an unholy rush to grab the foreign money.
Lets not bother playing the long game lets just sell whatever we can now and hope the next generation are shown some benevolence by their foreign paymasters.
Forget the minutiae and detail. Farmers need to invest or get out. This company needs $250 mln it seems. If farmers won't invest at that level they will end up with 100% of an atrophying irrelevant processor. Others are already taking advantage of that lack of investment and foresight and prospering. I suspect even those SFF shareholders who support this restructure will end up selling their livestock to the better, more nimble, more market-oriented alternatives in the not-too-distant future.
But this SFF recapitalisation gives the real chance that they can claim back a leadership position. It's just been too long in happening. 50% of something will always be more than 100% of nothing. It's the price of delay; its a cost of the cooperative structure. We are not in the 1970s any more.
It's a bad deal. It's a terrible deal. Some of the best lawyers tell us it's an illegal deal. A crooked deal. A dud deal.
David its like when you are on holiday and your son sells your car to someone. You love your son but you know he's done wrong. He knows he is wrong. Done a bad thing. Done something that needs be fixed. That's what we have, a terrible deal that needs fixing. It's gotta be done David. It's gotta be done now by good people fixed.
We need a great deal. Sheep and Beef farmers are great people. Some of the best people. People in New Zealand are great people and Sheep and Beef farmers are some of the best people you will ever meet. They deserve a great deal. We need to get some great New Zealand people and some people that are great negotiators to raise the the money. It's $100m. It's not s lot of money. It's money to sit there and keep the banker's happy. Hell they probably don't even need the whole $100m. Cause the banker's want to lend money. They have to, it's their job to.
We need good people and great negotiators to meet with the Chinese. The Chinese are great people. Look at it 5,000 years of history. You don't do that with out learning how to do a good deal. They are winning. They win in all their deals. Every where they win in their deals. We need to win in our deals.
The Chinese won't respect us until we win in deals with them. They are a good people but as a group can be persuaded to do stuff. They have a reputation for being gamblers and traders, but really they are just followers, one after the other following. They tell each other to do things. You see it here in Auckland houses, you see with houses every where, following. They tell each other to do stuff and suddenly it looks like they are trading or investing. They are just following. Being told.
We need a great deal that shows them the way. They will love it. They will love us. They will say those good New Zealanders they are great, they do great deals. They are good like us...
Too late. This cooperative stuffed around for too long and the opportunity has passed them by. This is the only practical deal, and probably one shareholders are lucky to get. (Sure there will be vultures around with other promises, but not ones where existing shareholders will keep 50%.)
The time to front with the additional $250 mln was 3+ years ago. But you kept chasing phantoms, ignored commercial reality.
A clue about how shallow commercial thinking is by some farmers is contained in another comment. Reducing inventory by $230 mln is not capital raising. It shows even some farmers don't understand seasonal inventory flows, or even longer business cycles.
If you undercapitalise any business, in the end you will be caught out. SFF is now caught out. And it is probably too late to look for alternatives. Should have stumped up with the extra capital a few years ago. The opportunity for "a great deal" is now long gone.
The inability (even now) for farmers to "get on with it" given the hard facts is emblematic with what has been wrong with the cooperative model for SFF for a long time.
The opportunity for 'a great deal' is now long gone.
But so bad. Why so bad and bad negotiating. The negotiating was terrible, just terrible.who were the negotitors. Who didn't understand the rules of the co-op? If guilty they should never work here again. They are too much trouble. Make too much trouble for everyone.
If you go into a deal thinking and telling your shareholders you can not walk away you are a terrible negotiator. Why would you say that to your people. It doesn't sound straight. Why would you let the Chinese win like that. Just like that. Straight away you have no position, you have given it to them. Gifting. It was like 3 times the amount of money we needed. We didn't need the money. Put the extra money into an incountry marketing joint venture. Fund the in China bit and put the debt there. Its the only way to see cashflow from in China. Believe us. Chinese accounting is very different.
So of course you can walk away. And then there is the deal being so bad thats it's illegal.
The Chinese understand New Zealand sheep and beef farmers and them can not get into a deal the lawyers say is illegal. Good people don't do that. Bad deals and illegal deals see people go to jail. Jail was what happened to Fortex. Jail and some executives left the country, never worked in the country again. Couldn't.
It's a bad deal. You walk away from bad deals.
You are right in so far as the facts were all made public. It was clear that the bank debt had been slashed, but this was right at the last moment and after a concerted publicity campaign based on the previous very scary figures. Any company that can reduce it's bank debt from $350M to $120M is certainly not in any financial trouble and one has to question whether the $350M figure was ever real or just part of a smoke and mirror exercise to scare the farmers. How can you magic up $230m in such a short time?
David, hard to blame farmers for not fronting the money when we were not given the opportunity!
It was assumed we wouldn't , possibly correctly, but other NZ entities were prepared to provide short term funding, all facilitated by the SFF board itself. Given SFF had paid off $260m in debt in the previous two years and were down to $120m by years end it should have easily been in a position to roll over its funding. The information pack that went out with the voting paper clearly showed them on a track to no net debt within 3 years and dividends higher under status quo than those delivered by the SM partnership. That's what happens when you only own 50%, you only get 50% of the dividend.
This was a hatchet job by the banks pure and simple. The industry had refused to rationalise itself so the banks stepped in and picked the winners and decided that SFF was to be the loser. The banks were understandably looking after their own interests but lets not pretend it is in farmers, or New Zealand's, long term interests to be price takers at the end of a supply chain controlled by a foreign govt.
"Any company that can reduce it's bank debt from $350M to $120M is certainly not in any financial trouble and one has to question whether the $350M figure was ever real or just part of a smoke and mirror exercise to scare the farmers. How can you magic up $230m in the space of a year?"
Thank you Chris M. David - can this be the quote of the week please.
New Zealand is wracked with bad businessmen. And SFF epitomised this. They are hopeless. They took over good businesses and made them bad. They offended their suppliers, they offended their partners. They traded stock for shares and then they dematerialised these shares. It is not surprising they couldnt even manage this sale without hoohaa. As for farmers putting more money in to back it....David thats what happens in a drought year. Albeit not by choice.
I accept the SFF debt reduction appears too good to be true and gives the impression the company didn't need recapitalising to the extent of the full Shanghai Maling deal. But there are two major factors to take into account here:
- SFF's performance, including prior year losses, high inventory, debt levels and previous capital raising attempts, gave the banks no confidence things would change; one good year (even with a second good year forecast) doesn't change the fundamental volatility of the meat industry.
- PPCS was a successful, efficient, South Island cooperative until it launched its dubious takeover of Richmond by hiding behind a Maori group; the ill will caused by this hostile takeover and the failure to get Richmond suppliers to share up according to their livestock supply (they couldn't because the suppliers would have deserted in droves) meant the company was always struggling to compete for livestock supply and find the capital on R&M and plant upgrades.
In my opinion SFF has tried to reinvent itself from a position of weakness and this is the best chance it has to achieve that, but shareholders should stop moaning about loss of control and get on with it. PPCS/SFF effectively resigned control when it bought Richmond.
Thanks for the comment about the debt reduction Alan. There was a real change in story was there not. There is a shareholder revolt and for good reason. They were being told 'there is no alternative' (Shades of Ma Thatcher) when that was not quite right. And would make anybody suspicious of the machinations of the financiers here. It was not in the interests of the company or it's shareholders.
Perhaps the way forward is what Henry says above. "............Put the extra money into an incountry marketing joint venture. Fund the in China bit and put the debt there. Its the only way to see cashflow from in China. Believe us. Chinese accounting is very different........"
Allan, I accept you are somewhat of a meat industry historian but viewing everything through the rear view mirror has little relevance. I accept it does help to give context to how things got to where they were and as Belle alludes weighs(too) heavily on many farmers decision making processes.
However what we were tasked with was assessing SFFs current position and deducting whether its future prospects were enhanced by the SM deal or whether the status quo was preferable. What stymied that decision making process was the implied (in my strong view, false) threats of liquidation should the vote fail and the fact that the information provided was proved to be materially inaccurate. In fact the TV3 story suggests that SM were given far more detailed information and forward projections than the actual shareholders. All this leads me to believe it was a hatchet job for which farmers were viewed as mere pawns in the process.
AJ. For you.
Structure aside.
Eg. Others doing a duck dive.
http://www.asx.com.au/asxpdf/20160229/pdf/435fsj8pcf81rs.pdf
http://www.asx.com.au/asxpdf/20160229/pdf/435fq5gps7nyhq.pdf
http://www.asx.com.au/asxpdf/20160302/pdf/435k9j5mvfstzd.pdf
http://www.bloomberg.com/quote/WLD:AU
look at the one year chart. the price has divided by about 3.
we are calling the proforma BUSTED.
"shareholders should stop moaning about loss of control and get on with it" - Er, how about if someone just took your car Allan without your authority and sold it, would you just "get on with it" and not worry about having just lost your car? I don't think so. Sheep Shagger is right about you looking at this in the rear view mirror. Oh, I forgot, you've just lost your car; never mind, eh?
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.