[This post was first published in the Fairfax NZ Sunday Star Times on 2 Nov 2014 under the title ‘Breaking up the family silver’]
During 2014, I have written several times about the challenges of restructuring the meat industry. I have described the period we have been going through as akin the phony war as all sides prepared for battle, but everyone waiting for someone else to make the first move. Now, within the last ten days, we are seeing the first signs of action.
The key announcement, easy to miss within a wide-ranging media release covering multiple topics, is that Silver Fern Farms is restructuring into species specific business units. This contrasts a decision reported in the 2013 Annual Report that Silver Fern Farms had re-organised its sales on a geographical rather than species basis.
Why the change? Well, there is only one logical reason. The move will allow the overall business to be split into separate sheep, cattle and deer businesses. Each of these has potential to be of interest to buyers who could not contemplate the enormity of buying the whole business.
To understand what is happening, some background is necessary.
Silver Fern Farms is New Zealand’s biggest livestock processing and marketing company. It started operations back in 1948 as the Primary Producers Co-operative Society (PPCS). Over time, it prospered and grew in an industry where others were falling over. Then in the late 1990s it took a step which has arguably proved to be its long term undoing. It got involved in a secret campaign to invest in Hawkes Bay based Richmond Meats, working towards a long term goal of majority ownership. In the process it ran foul of the law. To extricate itself from an untenable business position, it took over the total company in 2006. But the cost was high. Silver Fern Farms, still known in those days as PPCS, had to take on lots of debt. From that time onwards it has always struggled.
The Richmond saga led soon thereafter to Keith Cooper taking on the role of CEO. Although appointed from within the company, he certainly acted like a new broom. One industry leader said to me at the time that Keith Cooper had the worst job in New Zealand, with nowhere to turn for easy success. Now, some eight years later, Keith Cooper has decided to move on.
These last eight years have seen Silver Fern Farms try to reposition itself as a food company rather than a commodity company. It has not been an easy transition and there is still a long way to go. The culture at the top has certainly changed, but developing consumer markets takes both time and capital. And it seems that time now run out, at least within the present structure.
A fundamental restructuring would have come in 2008 if PGG Wrightson, led in those times by Craig Norgate, had succeeded with a $220 million takeover for a 50 percent share of Silver Fern Farms. The timing provide disastrous with the Global Financial Crisis about to unfold. PGG Wrightson was unable to settle on the deal and paid compensation of cash and shares worth $42 million in total. This provided an interim lifeline to Silver Fern Farms.
Silver Fern Farms has announced that profit for the year ended 30 September 2014 will be between $5 million and $7 million pretax. That is much better than last year’s pretax loss of $36.5 million, but it still leaves aggregate five-year losses of about $40 million.
Chairman Rob Hewett has indicated that Silver Fern Farms has no fixed ideas as to how the restructuring will play out, except that they will be working with the guidance of an investment bank and the support of their banking consortium. In the final analysis, when companies are struggling to manage their debt, it is always the bankers who have the final say.
Events could now play out in several ways. The beef part of the business could be of interest to the largely Japanese-owned ANZCO or to the Talleys-owned AFFCO. Either way, Commerce Commission approval is likely to be needed. Alternatively, it could be Chinese or Brazilian interests that step up with an offer.
With the beef side of the business divested, then Alliance would surely look seriously at the sheep business. It will all depend on whether the price is right. Once the banks are paid, then whether or not there will be any cash left for Silver Fern Farms shareholders is a moot point.
That leaves just the Silver Fern Farms venison business. My guess is that we might see a new venison co-operative take over those assets.
So it looks as if the phony war is just about over. The forthcoming restructure is likely to bring new stability to the processing and marketing industry. However, whether farmers will be better off with the new structure is far from guaranteed; it could depend on who buys the Silver Fern assets. In the meantime, Silver Fern Farms will need to reassure its farmer suppliers that payment for supplied stock is guaranteed.
Posts from Keith Woodford 
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Hi Keith,
While restructuring to facilitate a subsequent sell off is an attractive idea, it is also quite sensible that a restructure as described here may result in much improved market focus, operating efficiencies, and profits if history is anything to go by. In the early 90s a major Nth Island processor moved from the Harvard value chain model (procurement, operations, logistics, sales, with a corporate function covering HR, admin, accounting, compliance, R&D etc) to a model that consisted of companies trading respectively in livestock, beef, lamb, leather, and a catch-all co that included renderables, casings, a cannery, local market sales, and smallgood production. The cost was extra management overhead (and huge haggling over intercompany transfer prices it must be said), the benefits were manifold viz: the ability to measure and apply new investment/divestment to what was profitable, improved focus on quality and consistency (an issue in multiplant scenarios), yields (e.g 1% of meat left on the bones can see all profits gone), productivity, and the conversion of many fixed costs (refrigeration, lab testing, etc) to variable (higher unit cost but lower in total over the year). The result two years in was the emergence of: more consistent earnings, single species plants, more sensible location of plants, closure of unnecessary capacity, divestment of significant non-core assets, more investment in overseas marketing and sales, happier customers, and dare I say it more motivated staff. After two years some overhead reduction occurred via merging of the beef and lamb companies into a Foods company.
The interdependence of the new companies though remained strong (eg mixed drystock finishers would prefer a single buying agent, than a more expensive arrangement of a buyer from each of the beef and lamb companies). The leaders of each company comprised the senior managment team, and integration was a hugely important function as not all decisions that improved the individual operating company would be “optimal” for the corporate…..
I am not challenging your speculations here, just observing that the rationale for restructuring may be boringly orthodox, and also observing that experience suggests the changes are likely to deliver net benefit even without any subsequent sales.
Cheers,
Brian Dingwall
Brian
I do not argue with your proposition that the proposed model may have multiple benefits. But I am confident that in the case of SFF the driver of the proposed model is on the ‘friendly advice’ of the banks. It is all about maximising the options.
Keith W
I would be most surprised if your confidence were misplaced. Your ear is closer to the ground than mine.
I should have noted that in my example above, the banks were substantially interested key “advisers” promoting (or in reality insisting on) the restructures, and they in turn may have been relying on a certain well known international consultancy…..that alternated its advice between “decentralise” and “centralise”……
One thing academicians could address is: When considering real option maximisation, operating efficiently, and serving markets, is there a “right” structure for an FMCG business that in its first steps, like car wrecking, is a disassembly business, rather than an assembly business? And for good reasons any necessary subsequent reassembly often occurs in export markets (and vastly differenty in each)……
Structure on inputs, outputs, processes, markets, regions, or some combination or matrix, the possibilities are many…. Even just identifying and evaluating the structural options listing each’s pros and cons would be a good start. A very basic five forces analysis reveals that the industry is a bloody hard place to obtain rents….this alone motivates meat companies to invest in the downstream supply chain…again complicating structures (and arbitrary transfer pricing can hide where margins are truly being generated).
I confess I lived in this space for 10 years without my peers and me coming up with a solid and lasting solution….
Cheers
B
When we use robot for milking, how cows become ready for giving milk without useing its calf at first hand.If they are useing any injection for milk production start.