Silver Fern Farms PGW Plan Not Silver Bullet

The proposal for PGG Wrightson to take a 50% stake in Silver Fern Farms is not a silver bullet for the meat industry and initial reaction to the concept isn’t very positive.

… yesterday’s announcement went down like a “cup of cold sick” with shareholders, who fear farmer-ownership of New Zealand’s largest meat company will be diluted.

Mossburn farmer Stephen Cullen said he was “bloody shocked” that Silver Fern Farms wanted to effectively sell its soul to outside interests and alienate itself from the rest of the industry.

Farmers feel very strongly about retention of farmer-control in the processing industry.

Meat Industry Action Group chairman John Gregan said he was “staggered” that PGG-Wrightson wanted, what he believed, was a controlling share in Silver Fern Farms.

“There’s no doubt the current structure is failing us, but the loss of farmer shareholding will be a sore point for some,” he said.

Mr Gregan believed it would be a “big ask” to achieve the 75 percent voter threshold required to advance the partnership.

MIAG has gathered proxies from SFF & Alliance shareholders to call a special general meeting of both companies aimed at getting the two comapnies together. I don’t know whether the proxies will enable MIAG to vote on the SFF PGW deal as well.
Federated Farmers Southland meat & fibre chair Martin Hall agreed the 75% would be difficult and farmers would have to dedecide whether they wanted to be an owner of a meat company or just a participant.

“I’m a bit angry about it. They (Silver Fern Farms) didn’t dream it up last month. It takes a long time to put together something like this.”

MIAG is meeting SFF chair Eion Garden today. One of the questions they could ask is: why SFF let the Meat Industry Taskforce waste time and money starting the process of developing an industry strategy when they SFF must have already been planning the deal with PGW?

Garden believes shareholders will support the initiative becuase of the immediate benefits.

The new board of SFF would decide on the use of the $220 million, but a sizeable chunk would go on the upgrade of existing processing plants, including the use of robotic meat-cutting systems developed between SFF and Dunedin’s Scott Technology.

“This industry is starved of capital.

It’s one of the fundamental reasons we don’t have strong balance sheets and strong profits on a long-term basis,” Mr Garden said.

He is right that lack of capital is a problem, but it’s not the only one. The drastic drop in sheep numbers has resulted in an over-supply of killing space so whether or not the deal goes ahead there will be more works closures.

The other problem is marketing and SFF & PGW say more money would be spent on researching customers and stronger branding of New Zealand meat. But they also say the money won’t be used for reducing debt and high debt is one of SFF’s big problems.

I haven’t spoken to anyone who is wildly enthusiastic about the plan yet but perhaps I’m talking to the wrong people. The ODT found a more positive reaction from Otago Fed Farmers meat & fibre chair Rob Lawson because it involved Craig Norgate.

I am cautiously optimistic. I can see some really positive things, and one of those is the business acumen of Craig Norgate and the PGG Wrightson team.”

Other factors the Merton farmer saw as favourable were the injection of $220 million from PGG Wrightson; the move to an integrated supply chain linking consumers with farmers; the potential for industry rationalisation; and the market focus the investment would encourage.

All these are fair points and there is no doubting Norgate’s abilities, nor his powers of persuasion. If he fronts a road show to sell the concept he may be able to change the minds of at least some of those who aren’t enthusiastic about it.

The loss of total farmer control of SFF was a possible concern, but Mr Lawson said farmers had to ask themselves what farmer control of the meat industry had achieved so far.

That’s a fair question but as Fonterra found when they tried to persuade their shareholders to open up the company to outside investment that farmers aren’t keen to lose control.

4 Responses to Silver Fern Farms PGW Plan Not Silver Bullet

  1. Jeff Grigor says:

    It is interesting that farmers are opposed to this initiative because they don’t want to lose control of Silver Fern Farms.
    I would have thought that it would be obvvious to even the most obtuse that the co-operative model for both of NZ’s biggest meat processing companies has been an unmitigated disaster.


  2. homepaddock says:

    Jeff – is it the ownership and structure that are wrong or the strategy?

    I reckon it’s the latter, though I accept an improved strategy might require a different structure.


  3. Ed Snack says:

    I reckon the worried ones should be PGGW’s shareholders. I struggle to see what’s in it for them, and I would also suggest that many farmers still remember the way the rural services companies epitomised by PGGW treated them in the past, ripping them off wholesale on financing costs.

    Amusing too this talk about marketing, the one company that is stuffing the market for everyone else overseas is PPCS, and has been for a couple of years now. Just when you think you have negotiated a few more cents/kg, along would come PPCS and drop their price to unload a bit more stock at the behest of their bankers.

    The one thing I can see that they can leverage is PGGW’s dominant position as the largest stock agency. But if they try to cut other companies out of the supply chain there will be a huge reaction, none of it good for PGGW. No, I can’t really see what this deal is all about except as an emergency bailout. Perhaps PPCS is shakier than we know, and Westpac is pushing very hard to get its money out.


  4. Colin E McIntyre says:

    Under the definition of transacting shareholders would it be correct to assume that supplier shareholders of Silver Fern Farms are also transacting shareholders and this combined with PGG Wrightsons Transacting shares would give well over the 60% shareholding of transacting shareholders required .
    For further eddification visit the following websites

    Click to access pdf_display.cfm

    Colin E McIntyre | July 3, 2008 |


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