Opposition to Chinese bid for Silver Fern

Silver Fern FarmsOpponents of a deal to sell half of Silver Fern Farms to China’s state-owned Bright Foods, increasing the dominance of New Zealand’s largest meat processor while leaving it debt-free, say they will continue to push for a locally funded alternative.

The board of Silver Fern Farms (SFF) has unanimously recommended accepting the proposal for a 50:50 joint venture with Bright Foods subsidiary Shanghai Maling Aquarius, which would invest $261 million in the business through a transaction that values SFF’s equity at $311 million. The new SFF will be half-owned by the current cooperative and half by the Chinese firm. Goldman Sachs is advising SFF.

A special dividend of $35 million, or 30 cents a share is being dangled in front of the cooperative’s ordinary and rebate shareholders providing half of them vote in favour of the transaction at a special general meeting on October 16. Before then, the company plans to embark on a roadshow to promote the merits of the deal.

An alternative funding proposal from a group of New Zealand agribusiness companies to underwrite a rights issue for between $40 million and $50 million was rejected by SFF’s bankers, but the group planned to make an amended proposal with a “substantially” increased level of underwrite, said one of the organisers, Wanaka-based businessman John Rodwell.

There was still a “real option” for Silver Fern shareholders that would retain ownership of SFF in New Zealand hands, he said. “If the Silver Fern Farms directors see fit, we are ready to present a revised proposal for their board and bankers to consider.” The offer does not involve SFF’s meat processing competitors.

The deal would allow Bright Foods to straddle New Zealand’s two biggest export commodities, having become a major shareholder in milk processor Synlait Milk. Chinese firms including Shanghai Pengxin have been acquiring primary production in New Zealand to benefit from growing demand for protein from that nation’s burgeoning middle class.

In seeking a tie-up with Bright Foods, SFF will also be hoping to head off a proposal for a merger or collaboration with rival Alliance Group. Both Alliance and SFF are required to hold special general meetings to consider merger benefits following shareholder votes.

Allan Richardson, a spokesman for shareholders supporting a merger, said that after months of being strung along by the SFF board, he has been told that meeting will be called on the same day they are to vote on the deal with Bright Foods’ Shanghai Maling.

Richardson questioned why Shanghai Maling couldn’t have become a cornerstone investor rather than a 50 per cent shareholder in the company, which had turned itself around and was starting to see a pay-off from its value-add strategy.

“In the short-term this may be good for farmer shareholders but what happens when the honeymoon is over and they have lost control of the supply chain?,” he said. “This is being driven by the banks.”

Alliance, the country’s second-largest red meat processor, confirmed it had submitted a bid for SFF prior to the capital-raising process but chairman Murray Taggart said he could not comment for legal reasons on whether it had actively been involved in the range of options handled by Goldman Sachs.

Taggart said SFF’s decision to sell half its business to Chinese investors would leave Alliance as New Zealand’s only 100 per cent farmer-owned red meat processor. The best way for farmers to retain ownership of their industry would be to supply Alliance, he said.

Ensuring livestock supply was the major reason SFF is putting its decision on Chinese investment to the vote despite not being legally required to do so, said chairman Rob Hewett.

Peter McDonald, chairman of the Meat Industry Excellence Group, which is also pushing for industry consolidation, said all parties “will be trying to win favour with farmer suppliers now”.

He said the capital injection into Silver Fern Farms would solve its over-capacity problems and agreed with Hewett that it would be a game changer for the red meat industry, though he disagreed about the merits of the Chinese deal. He said farmer support will grow for the alternative, New Zealand-backed option.

“Throughput defines profitability, it always has in the past and continues to do so,” he said. “Getting stock is the number one issue. On paper this may look like a good deal but I think farmers understand this isn’t a good deal for the long-term value of their family businesses.”

SFF chairman Hewett said the board was focused on “taking the handbrake off” the company and it would position the company better to continue conversations with other meat processors about partnership deals to solve over-capacity and other issues.

Under this deal, SFF will have the strongest balance sheet of any red meat company in New Zealand with zero debt, be in a positive cash position by the end of next year, and have the money it needs to invest in updating its plants nationwide and increasing its value-add Plate to Pasture strategy, particularly in China, Hewett said.

The Shanghai Maling proposal was the only one to win banker support, and left the company in a good financial position. No other offer measured up, Hewett said.

“Our balance sheet has been under pressure for several years and if you look all the others in the industry their balance sheets are in a similar state,” he said. “We’ve had a good year but it’s a bit like being the tallest in a bunch of pygmies. It’s not where we want to be.”

The intention is to pay 50 per cent of net profits as a dividend to both shareholders in future, pending board approval.

The cooperative will continue to procure livestock from farmers as it does now and Dean Hamilton, who will remain as CEO of the new company, said the decline in stock numbers should start to abate with the slowing of dairy conversions while lambing numbers were holding steady.

He said SFF, which processes around a third of New Zealand’s red meat, would not drive a procurement battle for livestock and was instead focused on adding value to the meat and for its farmer suppliers.

The new company’s governance structure will be a 10-person, co-chaired board, with the cooperative supplying five directors, of which three will be farmers, and the Chinese company the other half.

The deal requires approval by the Overseas Investment Commission and Chinese state regulatory authorities and may take six-to-nine months to complete. SFF’s bankers are prepared to wait until then for this deal even though its debt facility falls due next month.

Federated Farmers sees Shanghai Maling’s proposed investment in a joint venture with Silver Fern Farms as an overwhelming vote of confidence in the country’s red meat industry. However, it is encouraging Silver Fern Farms’ shareholders to carefully consider the offer.

President, Dr William Rolleston, said that, while the offer strengthens the business and offers potential for further growth in the Chinese market, there are some key issues for shareholders to work through ahead of the special general meeting on October 16.

“Silver Fern Farms buys and processes a considerable proportion of New Zealand’s beef and lamb, so we need it to be sustainable and successful. The proposed joint venture has the potential to create significant opportunity, but shareholders need to consider the offer in detail,” he said.

“There are a lot of factors that will ultimately determine whether this is the right deal for shareholders, and not all of them are clear from what has been announced today. Key questions include what value has been placed on Silver Fern Farms’ significant body of intellectual property and whether a strong emphasis on the Chinese market will prove restrictive if that market weakens.”

Nerine Zoio: nerine@insideretail.co.nz



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