Barber’s Wire: Independent report and roadshow fail to satisfy all shareholders

Allan BarberIn spite of apparently solid support for the Shanghai Maling deal at Silver Fern Farms’ (SFF’s) road show meetings, there are a number of long-term shareholders in the far south who feel let down and ripped off by the company’s determination to sell 50% of their co-operative, comments meat industry commentator Allan Barber.

Their displeasure has two main causes, one historical and the other current: the historical reason is the company’s departure from cooperative principles after the Richmond takeover; the more current reason is based on a belief there should be no need to commit to a partnership which sacrifices control of the cooperative. However, one could argue control has long gone, with present controllers the banks being replaced by a Chinese meat company.

There is nothing now to be done about the Richmond takeover which was characterised by acrimony on both sides, as well as the substantial debt burden it imposed on PPCS which had been a successful business for over 50 years. These shareholders feel the company could have raised all the capital it needed, if it had insisted on new suppliers becoming shareholders; but because of the threat of a supplier exodus, PPCS decided to retain supply by accepting livestock from non-shareholders.

This was an inevitable decision in the very different North Island climate and that horse has long since bolted. AFFCO’s status as a co-operative in anything but name had long disappeared before its capital restructuring in the mid-1990s.

The justification for selling half the operating business, including processing assets, brands, intellectual property and production supplied by the co-operative, can be found in the Notice of Meeting sent to shareholders and available on the SFF website. The attached Grant Samuel Independent Report contains essentially the same information as the Notice of Meeting which is logical, as much of Grant Samuel’s information came from discussions with company management and directors.

This is probably inevitable, but it raises the question whether an independent report, produced on behalf of and in consultation with a company, can ever be truly independent. The strong probability must be the conclusion will always corroborate the client’s preferred course of action, provided it makes sense.

That said, the partnership with Shanghai Maling appears to be an offer which ticks many boxes which are beneficial to SFF and, it could be said, its suppliers. Shareholders will receive a 30 cent a share dividend, having received no dividends and seen the value of their shares fall to 35 percent of par value; they are also virtually guaranteed to be paid a competitive price for their livestock and dividends in future. The company will be debt free and, in chairman Rob Hewett’s words, the value add ‘plate to pasture’ strategy will gain a turbo charge.

The key conclusion in the Grant Samuel report is the following excerpt which states: “As a result of an improved financial performance and other strategic initiatives SFF Co-Op has achieved a degree of de-leveraging over the last two years and it is arguable that given time it will be able to achieve a more conservative capital structure without the need for new capital. Nevertheless, the Proposed Transaction achieves the recapitalisation, removes uncertainty, creates new opportunities for growth and is strongly supported by the Board of SFF Co-Op and the Banking Syndicate.”

The removal of the uncertainty that has bedevilled the company for several years and the unwillingness of at least some of the banking syndicate to extend facilities beyond the end of this month without a firm, bankable proposal are two very good reasons for accepting the deal.

In time, the company will be able to transition to its intended supplier remuneration policy of rewarding suppliers for their ability to comply with market specifications. But first there must be a serious review of processing facilities and tough decisions about plant upgrades or closures, because SFF has more capacity than any of its competitors, quite a lot of it less efficient. The recapitalisation will enable this to occur without having to go cap in hand to the banks.

For suppliers who support the partnership proposal, the important points are survival of the company, certainty of payment and possibly belief in Shanghai Maling’s ability to enhance the returns from the ‘pasture to plate’ strategy without keeping all the additional profit for itself. Conversely, the objectors believe SFF has departed irrevocably from its co-operative principles and should have been able to find alternative capital without selling half the business, while Shanghai Maling will take all the upstream margin.

At this stage, it is impossible to predict whether, and for how long, Shanghai Maling will be content to remain in a true 50/50 partnership which is a notoriously troublesome business form. History suggests it won’t last this way for ever because, in a joint venture, one partner generally ends up screwing the other. Inevitably, it will be the stronger partner that finishes on top and there are no prizes for guessing the outcome here.

Unfortunately, those suppliers mourning the structural and philosophical change to their co-operative will have to face the reality of the financial position which SFF was faced with and the board has been compelled to resolve the best way it could. That’s what boards are meant to do. Equally, unhappy shareholders also have a choice and can look at the obvious alternative.

In proposing the deal with Shanghai Maling, SFF’s board has made a judgement call between the lesser of two evils: it has chosen the financial certainty of new capital in exchange for half the business, believing this to be preferable to the risk of losing supply from disaffected shareholders. The amount of time it took to come up with this solution suggests the board must believe it had no choice in the end.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted at allan@barberstrategic.co.nz.

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