Nervous times at Silver Fern Farms

Silver Fern Farms announced last week to its farmer suppliers that it now expects no more than a breakeven return for the year ending 30 September 2016.  This should focus the minds of its farmer shareholders, who vote on 12 August as to whether or not Silver Fern Farms should proceed with the partial takeover by Shanghai Maling. 

The disappointing projected financial outcome – which could yet get worse – reinforces the notion that Silver Fern Farms lacks the necessary financial resilience to go it alone. There is increasing risk that without completion of the Shanghai Maling buy-in, that Silver Fern Farms will lose the support of its bankers and be placed in receivership. That is not an attractive option, for what has in recent years been New Zealand’s largest meat processor.

Last September I wrote that the Shanghai Maling deal was a very good one from the perspective of its New Zealand farmer-shareholders. It valued the shares, at that time trading at 35c, as being worth about $3.  And it provided the capital to do the necessary restructuring of the company, including upgrading some plants and closing down others, plus market development.

Farmers supported the deal at the time, with 82% voting in favour based on a 67% turnout. This support was despite a widespread understanding that, although structured as a 50/50 deal, in reality Shanghai Maling would be in effective control. But since that time, the seeds of doubt have been sown.

In the last 10 months, I have watched events from the sidelines, as disaffected shareholders, led by John Shrimpton but with others standing both alongside and behind him, have lobbied for a reconsideration of the deal.

The essence of their argument has been that last year’s better than expected profit of $24.9 million post tax (announced after the deal was voted on) proved that Silver Fern Farms could either go it alone or else prosper with a much smaller shareholding sold to Shanghai Maling or others.  The argument was bolstered by the headline that that Silver Fern Farms reduced its debt last year by some $168 million. But what got lost in the rhetoric was that Silver Fern Farms ended the last financial year with very little inventory, and that was the key reason for the debt reduction.

Come the new (current) season, Silver Fern Farms still needed to borrow several hundred million dollars of working capital to go with the $121 million of hard core debt at season opening.  This funding has been provided by the banks, but it is a one-off facility on the assumption that the Shanghai Maling deal goes ahead.

Although Silver Fern Farms may well be a leaner and more efficient operator than was the case prior to 2015, the company, while standing alone, remains just one bad year away from a financial disaster.  And taking the last five years in aggregate, the losses have exceeded the profits.  With this year added in, it is looking like six years where overall losses exceed overall profits. This is not a healthy company.

These latest financial projections should surely convince wavering farmers to renew support for the deal. However, with the ongoing delays in approval by the Overseas  Investment Office (OIO), new risks are emerging.

These ongoing delays show the Overseas Investment Office in a very poor light. How is it that the decision has dragged on for what is now upwards of a year? The inability of the Overseas Investment Office to act expeditiously on this and other applications is now acting as a major dis-incentive to other overseas investors considering investing their capital in New Zealand agribusiness.  It is hard to characterise the delays other than as a mix of bureaucratic and institutional paralysis.

The Overseas Investment Office has stated that currently their hands are tied until Shanghai Maling provides additional information. But there is surely a story behind that.

The drum beats that I am hearing out of Wellington are that it is the good character test that is holding things up. The Overseas Investment Office has been embarrassed by disclosures that it had approved investments by an Argentinian of doubtful character, and without doing rigorous due diligence. The blow-back from that has been the Overseas Investment Office developing new procedures on the run. 

The Government now needs to look closely at the messages that these delays send to the wider investing community. What is needed are transparent and explicit rules, followed by quick decisions.

Last September I was in Beijing at the time the Lochinver Station application from Shanghai Pengxin was turned down by the New Zealand Government. I was there as member of the New Zealand China Council delegation led by Minister Steven Joyce.

Minister Joyce reported that at his private meeting with the Chinese Premier Li Keqiang he had been questioned as to the broader implication of the Lochinver Station rejection. He had to try and explain that the Lochinver rejection was a ‘special case’ and that Chinese investments were indeed welcome. The argument at the time was that New Zealand operated a rules-based system, but subsequently it became apparent that it was Ministers Paula Bennett and Louise Upston who rejected an approval recommendation from the Overseas Investment Office. That did not look good over in Beijing.

The broader response from our Chinese colleagues at the Forum was more than raised eyebrows. I therefore returned to New Zealand with a clear personal judgment about the Silver Fern Farms application, which back then was about to start the first stages of its approval journey. It seemed evident to me that any rejection of the Silver Fern Farms proposal by the Overseas Investment Office would signify an effective fracturing of the special relationship that has existed between New Zealand China in recent decades.  It would be the final straw.

Now, some ten months later, the application is still caught somewhere in the system. Shanghai Maling have agreed to a further three-month extension, but it would be understandable if they were to walk away should they decide that the business environment has now changed, and that doing business in New Zealand has become too difficult.

The history of New Zealand’s special relationship with China is not widely understood.  It can be traced back to that iconic New Zealander Rewi Alley who first went to China in 1927 and lived there until his death in the 1987.  Although often pilloried in New Zealand throughout the 1950s, 60s and early 70s for his political leanings, it was Alley who built enduring links.

I first met Rewi Alley in 1971 when I interviewed him on the day of his 74th birthday during a trip he made back to New Zealand. And then I met him again in Beijing in 1973. He was truly a remarkable man. At times life must have been very difficult, not least in the early days of the Cultural Revolution when many things went crazy.   However, in amongst the turmoil, Premier Zhou Enlai protected him from some of the worst excesses, including very publicly at one stage coming down from the Praesidium to sit with Rewi Alley at a major sporting event. It was an indication that Alley was his personal friend and was not to be touched.

From those foundations, New Zealand has been recognised in China for a series of supportive actions. In particular, New Zealand was the first country to support China’s entry to the WTO, and subsequently was also the first country to recognise China as having a market economy.  The Chinese remembered the positions New Zealand took, and this surely influenced the decision by China that New Zealand would be the first developed country with which it would negotiate and sign a free trade agreement.

Since 2008, New Zealand has benefitted greatly from that FTA. It was not so much the reduction of tariffs although they were important, but the message it sent to Chinese companies that the Chinese Government supported business relationships with New Zealand.    More recently, New Zealand gained further respect for firm but deft handling of the melamine crisis at the time of the Beijing Olympics.

However, right now in 2016, the New Zealand China relationship seems somewhat more fragile, with significant irritations on both sides. In the greater scheme of things, the ongoing delays with the Shanghai Maling application cannot be helpful.  If this deal falls over as a consequence of decisions made within New Zealand, then there will be implications for all New Zealand agribusiness industries.   As I have said many times before, the New Zealand economy looks very shaky without a strong working relationship with China.

Assuming the Shanghai Maling application is approved, and the deal finally consummated between the business partners, then there are prospects are for a more robust meat industry in New Zealand.

There will still be the fully New Zealand owned Alliance Co-operative; there will be the New Zealand owned AFFCO controlled by the Talley family; there will be the largely Japanese owned ANZCO, and there will be the Chinese controlled Silver Fern Farms. And then there will still be a myriad of smaller companies, both local and overseas owned.

I look forward to seeing which business models prosper in that environment.   There is no attractive alternative. So let’s get on with it.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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4 Responses to Nervous times at Silver Fern Farms

  1. Hugh Gardyne says:

    SFF shareholders will be relieved to have received Notices for the SFF special meeting well in advance of the meeting date 12 August.
    Critical information shareholders should expect in the documents are absent.
    • There is no legal opinion to support SFF’s premise the deal giving control to Shanghai Maling is not a Major Transaction under the Companies Act. Or an understandable explanation why the restructure into species specific companies was necessary.
    • There are no reports on SM’s financial performance or financial position for the past 2 years, nor is there any comment from Grant Samuels on the suitability of SM as a JV partner in regard to those financials, or why that information is withheld.
    • There are no Director profiles of pending appointments to the new board from each JV partner.
    • There is no comprehensive risk analysis of the JV deal, particularly considering the 5 casting votes conceded in the boardroom to SM.
    Those are 4 pivotal matters that properly should be contained in the documents for shareholders to consider before they decide how to vote. SFF should explain these exclusions to shareholders urgently. They were in the PGW JV documents in 2008 for example.
    SFF should take the Shanghai Maling people that will be SFF Ltd’s new directors on the roadshow meetings commencing 26 July, and introduce them to shareholders. Remember how Craig Norgate was all over the shareholders addressing meetings for the last JV proposal. Where is Maling’s President Wieping Shen? Isn’t it time he fronted?
    Lastly, commentators critical of the Requisitioners calling for the special meeting should look beyond the proposed capital injection and understand the foregone profits if the SM deal proceeds. The opportunity cost of capital (say $200 mill) translates to as little as $1 – $2 per stock unit equivalent that SFF processes and reducing. Presently SFF Co-operative can, at the boards discretion, return 60 70% of NPAT as rebates and dividends. Under the proposal, SFF Ltd will retain 50- 70% of net profits with the remaining 30 – 50% split between the two shareholders which is 15 – 25% NPAT each. Commentators and reporters display extraordinary ignorance of the need and value of retaining majority shareholder control of SFF’s business. They might instead suggest SFF maintains financial discipline and meet budgets, like we do, instead of encouraging this sale of the century.
    Hugh Gardyne

    • Keith Woodford says:

      A key issue is that over the last six years (including this year) losses exceed profits. So this is a company with a record demonstrating minimal financial value and hence it is highly unattractive to banks. Farmers and other groups have had multiple opportunities to invest in this company but have not done so given the perceived financial risk. My assessment remains that if the Shanghai Maling deal is not consummated, for whatever reason, then SFF is likely to end up in receivership and be dismembered. I don’t think that is the best outcome either for farmers or SFF.
      So if the Shrimpton group wins the battle, one way or another, then it may well be very much a Pyrrhic victory.
      Keith Woodford

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  3. Paul says:

    Don’t disagree with being a good deal for shareholders. Someone ‘offering’ 8-10x share value is going to get support.
    What comes to mind is. ‘If it sounds to good to be true it usually is’.
    I personally don’t like this deal. SM is owned by Bright Food. I wouldn’t put them in the Mould of “we will turn SFFs into a global food brand”. Could be as much risk of the opposite.
    Where is the ex chair (2000-2006) of Bright Food Bright Food right now? Serving 18yrs in jail for corruption and bribes etc. Rot starts at the top. What real DD did SFF and their contractor do on SM? You would wonder.
    Have read of other stuff, but can’t find the info behind it so not going to comment.
    The OIO will take some blame. It will be more likely to do with economic changes in Bright Food & China that would stop the deal, if it is not followed through.

    Sounds to good to be true….

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