Where is PGG Wrightson heading?

[This post was first published in the Fairfax New Zealand Sunday Star Times on 6 July 2014]

The last decade has been tumultuous for leading agricultural services company PGG Wrightson. The current company was formed in 2005 with the merger of Pyne Gould Guinness and Wrightson. That merger was led by well-known agribusiness entrepreneur and former Fonterra CEO, Craig Norgate.

Norgate then took PGG Wrightson on a rough ride. It was he who provided the intellectual leadership behind the massive land buying associated with the PGG Wrightson offshoot Farming Systems Uruguay. This subsequently ran into trouble with the coalescence of a major drought and the 2008 Global Financial Crisis. Norgate also led the proposal for PGG Wrightson to purchase a 50% share in Silver Fern Farms for $220 million. That too ran into trouble due to the Global Financial Crisis.

By 2010 PGG Wrightson was in dire financial trouble. Norgate had to exit together with his key Dunedin-based partner Baird McConnon. The eventual outcome was a fire sale to the Chinese owned Agria Corporation, who in 2011 ended up as majority shareholders. Now, more than three years later, Agria is firmly in control, with four representatives on the eight person Board, and with Agria Executive Chairman Alan Lai also chairing the PGG Wrightson Board.

Agria is itself an unusual company. The company website (agriacorp.com) states that their principal office is in Shenzhen China. However, most of the directors appear to be either Singapore or Hong Kong based. They are listed on the New York Stock Exchange, but are registered in the Cayman Islands for tax purposes. Their major asset appears to be PGG Wrightson, which is incorporated into the Agria accounts as a subsidiary company. However, this ownership is actually held through majority interests in multiple additional layers of holding companies, including Agria Singapore and Agria Asia.

One thing about which there is no doubt is that all of the Agria companies and hence PGG Wrightson are effectively controlled by Alan Lai. His control of Agria Corporation is itself achieved through yet another company, Brothers Capital Ltd, of which he is sole director. It is an interesting example of how a relatively modest net asset base can be leveraged through multiple layers of holding companies to control a significantly sized operational company.

For any New Zealand-based long term shareholder, the journey has indeed been rough. Back in 2005, following the merger of Pyne Gould Guinness and Wrightson, the shares were valued at around $2.20. In 2008 they rose to almost $3, but then crashed badly. Now, in mid 2014, the shares are trading at a little above 40c. However, this is substantially above the 25 cents they reached in May 2013.

PGG Wrightson is a complex company, with interests in livestock selling, retailing, wool marketing, industry training, real estate, irrigation and seeds. They operate 99 stores and operate in 46 countries. In 2013 they grossed over $1 billion in earnings but their operating profit was only $ 46 million. Many of their businesses are low margin.

Last year they also wrote off $321 million of book assets for goodwill going back to the supposed synergies that were going to accrue from the 2005 merger. Those synergies never eventuated. The market capitalisation currently sits at a little over $300 million.

The big question for PGG Wrightson is where do they go from here? Their agri-servicing division, based around their 99 stores, is somewhat caught in a time warp. The company has struggled for more than 15 years as to how to reinvent this part of the business. I recall a discussion with the then CEO some 15 years ago, where he told me that within five years Wrightson (as it then was) would be a totally different business. But he could not tell me what that business would look like. In the years since then, there have been at least another five CEOs plus de facto CEO Craig Norgate. This illustrates both the high level of churn and an underlying struggle to find the right strategy.

The part of the business with the most promise is the seeds business. The seeds division has particular strengths in winter active pasture species. This has provided a strong foundation for business development in South America. However, finding synergies in China – very much a goal of the governance team – is more challenging. This is because Chinese agro-ecological conditions contrast greatly with those found in New Zealand where the plants have been bred.

A key question is whether the seeds division, including the fully owned Agricom subsidiary, should remain within the PGG Wrightson conglomerate. If it were a stand-alone company, then it would almost certainly become an attractive target for one of the global seed companies. Given that the company is already overseas-controlled, this could benefit shareholders, with no obvious downside for farmers. For comparison, the major local competitor in the seeds business is Agriseeds, which is now part of the Holland-headquartered Barenbrug group