Five months ago I wrote that whatever happened at Silver Fern Farms, it would be like an earthquake within the meat industry. Given that Silver Fern Farms is New Zealand’s largest meat company, and with the status quo unsustainable, it could not be any other way.
The offer that has now come forward from Shanghai Maling is remarkable. This offer, once regulatory approvals are received, will change Silver Fern Farms from being large but financially very weak, to being large and financially very strong.
Apart from mid-season working capital, Silver Fern Farms will be debt free and with cash in their war chest to ‘take it’ to their competitors.
Shanghai Maling’s proposal to stake $261 million for a 50 percent share of the company is well outside most people’s expectations. They have totally burnt off all other competing bids. To now get a return on that investment, they will indeed have to make the value-add part of the business hum.
Existing shareholders and employees must surely be ecstatic. CEO Dean Hamilton has truly ‘brought home the bacon’. Shares that were selling at 35c are now being valued by the bid at close to $3. But elsewhere in the industry, there will be lots of concern.
At Alliance, in particular, there will be some long faces. A year ago, they were confident that Silver Fern Farms was on its last legs. It seemed a reasonable assumption. Now it is Alliance which looks under threat.
The key reason for concern at Alliance is that they will now be the most vulnerable of the large meat companies with the least room to manoeuvre. Over-capacity is much more of an issue for sheep than beef, and it is in sheep that Alliance is ‘Number One’. In the long run, plant closures within the sheep industry are inevitable. Where will they come from?
The big question now is how farmers will respond, particularly in the South Island where co-operative principles have traditionally been regarded as important. Will some farmers now shift from Silver Fern Farms to Alliance? Alliance will be desperately hoping this occurs.
Co-operative principles are particularly valued by Meat Industry Excellence (MIE) farmers. This group will be particularly incensed by the Shanghai Maling proposals. If these farmers truly value co-operative principles, then they must surely now shift their allegiance to Alliance. If they don’t, then in the long run there will be no co-operatives in the meat industry.
It seems likely that at Silver Fern Farms there will still be a supply co-operative. But let there be no doubt, regardless of the precise legal structure, the new Silver Fern Farms will not in practice be a co-operative.
Some people will ask whether or not it matters if there are no meat co-operatives. I think the answer is that, at least in the South island, it is the co-operatives that underpin prices at the farm gate. In the North Island, where there is more competition, the influence of the co-operatives is neither as strong nor as needed.
Putting the co-operative issue aside, there is much to recommend about the Shanghai Maling proposal. Given their supermarket strengths, they are the ideal partner. The strategic fit is much stronger than would have been the case with Brazilian company JBS, the most likely of the non-Chinese suitors.
There is need to clarify the financial structure of Shanghai Maling. Silver Fern Farms has described it as a subsidiary of Bright Foods, but has also said that Bright Foods only owns 38 percent of Shanghai Maling. I note that another report has said 58 percent.
[Update 12.30pm 16 September 2015: I am now advised by a knowledgeable source in China (Ivan Kinsella from NZTE) that Shanghai Maling is owned 32% by Yimin which is itself wholly owned by Bright. Also, Bright has a 6% direct share in Shanghai Maling. Under Chinese company law, a company is regarded as a subsidiary in situations where a shareholder can exert controlling influence even if the shareholding is less than 50%, and apparently this is the situation with Bright and Shanghai Maling. A lot of the other investors are government-owned investment trusts and the like.]
Bright Foods has both previous and current experience in New Zealand. It was Bright which became the cornerstone shareholder at Synlait Milk when capital was desperately needed, and at one stage Bright had just over 50 percent shareholding. But with the Synlait deal they never sought governance control, which in itself is remarkable. Apparently they wanted majority ownership which gave them access to all the figures, but they wanted to stand back from management and overall control, and to learn from observation. Subsequently their shareholding has declined to about 39 percent as other shareholders have come in, including FrieslandCampina.
My understanding is that the Japanese majority owners at ANZCO, New Zealand’s fourth biggest meat company, have also always left the New Zealand managers and directors to make the key operational decisions.
Of course at this stage nothing is certain at Silver Fern Farms. There could be regulatory holdups. Also, at least in theory, there is an opportunity for New Zealand interests to match the Shanghai Maling bid. However, no New Zealand interests, even if they had the finance, could make this particular investment work. It needs a Chinese partner to manage the within-China supply chain.
In the absence of a local bidder, it is difficult to see the New Zealand regulators turning down the Shanghai Maling proposals. Without this Chinese partner, Silver Fern Farms slips back into the abyss. And that puts 7000 meat industry jobs at risk. No regulator would want to go there.
Nevertheless, the Shanghai Maling proposal will inevitably be very controversial. That is always the way with anything relating to Chinese investment. And with Bright Foods itself controlled by the Shanghai Government, some politicians, plus other groups and individuals, are going to have a field day.
Turning back to the overall New Zealand sheep industry, this coming year has the potential to be challenging both for farmers and processors. For farmers, the lower exchange rates will cushion low prices in international markets. But for processors, the reduced kill compared to last season is likely to lead to intense competition for stock.
This highlights that the last twelve months have been atypical for the processors, with abnormally large kills of sheep due to drought and also large kills of dairy cows. For beef, whether or not the high kill rate will continue in 2015/16 will depend on the milk price and the season. But for sheep, a considerably lower kill in 2015/16 is already locked in due to less ewes and lower lambing rates. Even without regard to the changes at Silver Fern Farms, the coming season will therefore be very challenging for the sheep processors.