Barber’s Wire: Silver Fern Farms deal not yet done

Allan Barber

Since his last column when Allan Barber tried to assess the motives and justification of the Silver Fern Farms shareholder group’s requisition, two interesting things have happened, he writes.

The most important development has been the Financial Market Authority’s conclusion there was nothing misleading in the company’s notice to shareholders in advance of the special meeting on 16 October to discuss the agreement with Shanghai Maling.

The second interesting event was Alliance Group chief executive David Surveyor’s comment to the Alliance conference that company was under serious pressure from its bankers to reduce debt at the same time as global prices had plummeted. In response, Alliance had succeeded in cutting its costs by $34 million with twice that amount still to come and in reducing its debt from $350 million to $120 million.

There has also been an implication Meat Industry Excellence (MIE) may be involved in the requisitioning group, although I am assured this has no foundation which is reassuring because it would be good to put the idea of a merger between SFF and Alliance to bed once and for all.

There is no evidence either meat company is any longer remotely interested in a deal which only a small rump of disaffected shareholders seems to think is a good idea. Silver Fern Farms (SFF) is ready to move to the next stage of its development with a strong balance sheet and a new partner, while Alliance is busy implementing plans which will result in a very different looking company.

The FMA’s report on its conclusions following a review of complaints about SFF is unequivocal and totally supportive of the company’s position there was nothing misleading or deceptive about information supplied to shareholders. The FMA expresses no view on the merits of the transaction with Shanghai Maling, nor does it have any view on the complaint regarding the type of resolution put to shareholders. It says this is a matter between shareholders and the company.

Contrary to Winston Peters’ claims the FMA failed to get sufficient information from SFF, the Authority states it is satisfied with the access and materials provided by the directors and management to enable it to complete its substantiation of the relevant information. One outstanding question is how much detail the FMA went into in its assessment, but following the report that now appears to be irrelevant.

In discussion with chief executive Dean Hamilton about the merits of the deal with Shanghai Maling as currently structured, he made the point very forcibly there were no acceptable alternatives available to the company. SFF had run a capital raising exercise for 10 months, during which time there were no firm New Zealand expressions of interest and the only other offers were for total control of the business. In SM’s case, it was willing to pay a substantial premium for 50 percent of a business which had a capital value of $100 million, based on the share price of 35 cents.

In response to John Shrimpton’s claim his group has no intention of disrupting or damaging the company, Hamilton expressed his frustration. It can’t be easy to be philosophical about the situation, while SFF has to spend time and money preparing for a special meeting it considers unnecessary finding responses to the points raised and obtaining an updated review of the financials from Grant Samuel.

I asked Hamilton what the bank syndicate’s position would be if the deal were not to be completed, either in the unlikely event the Overseas Investment Office (OIO) fails to respond before the deadline or any action as a result of the requisition. He said there is no reason to think the OIO will fail to respond, because it has always been aware of the 30 June deadline, while in the company’s opinion there is no other legal impediment.

However, a default would trigger a formal review of the facility which in Hamilton’s opinion would be an extremely serious event. The current facility is in place until 31 October 2016, but would be effectively superseded by the event of review.

It is not clear whether the group of 80 shareholders are fully aware of all the potential implications if SFF defaults on the contract with SM, but they must surely recognise the risks. It seems they are on the same wavelength as Winston Peters, believing any outcome, however catastrophic, is better than shedding control of 50 percent of the company to a Chinese partner.

At the risk of sounding like a cracked record, it is worth re-emphasising several points to those people who object to the solution the company has chosen to address its equity problems: SFF shareholders have already had several chances to recapitalise the company and there have been insufficient takers; the meat industry is highly volatile and demands a strong balance sheet to act as a buffer in bad years; farmer ownership without a robust capital structure and appropriate capital investment cannot guarantee ownership or control of value-added production; and, lastly, the directors would have been derelict in their duties if they had failed to conduct the equity raising programme and accept what they considered the best offer.

However, where SFF and its board is on shaky ground is on the continued claim this wasn’t a major transaction requiring 75 percent acceptance of the total shareholding, because clearly it involves transfer of ownership of more than 50 percent of the company to the new joint venture. This point is made very clearly in the Statement of Opposition for the special meeting.

If the shareholder group is successful in persuading sufficient shareholders to vote against the transaction, the requisitioning group would have a good case against SFF under the Companies Act.

I genuinely hope it doesn’t come to this, because such an outcome would be a Pyrrhic victory achieved at enormous cost to the company.

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

 

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