New era or just paying SFF’s debt?

If debt is not behind this deal, than why would a cooperative want to invite into the fold a company like PGG Wrightson, a public company dominated by two major shareholders?

The question comes from Jon Morgan.  His answer follows:

 The spin merchants for Silver Fern Farms and PGG Wrightson are hailing their merger proposal as the dawn of a wonderful new era in the meat industry.

 Well, they would say that.

They may be right, but here’s an alternative view. Some industry observers feel the deal is more about Silver Fern (formerly known as PPCS) finding someone to pay its debt.

Under the deal, PGG Wrightson will pay $220 million for 50 per cent of Silver Fern, a cooperative owned by 9000 farmer shareholders.

In October PPCS posted a $40 million loss but was back in the black this year with a first-half profit of $11.2 million. Though it expects to make big savings from plant closures it still has to find the money to pay for them – the recent Oringi shutdown is costed at $12 million-$15 million alone.

Silver Fern’s immediate concern is to make sure its accounts are passed for the financial year ending August 31 and it has to show the auditors that its bondholders are secure. Two tranches of bonds are in the market – $50 million to be repaid next March and $75 million due in December 2010.

Though this deal with PGG Wrightson would not be approved by shareholders till September it may be enough to cover any auditors’ concerns.

The debt goes back to the costly Richmond takeover, achieved after a long and bitter battle in 2004, and has been exacerbated by Silver Fern’s failure to make any money for the past three years.

If debt is not behind this deal, than why would a cooperative want to invite into the fold a company like PGG Wrightson, a public company dominated by two major shareholders?

That’s the cynic’s view of what the deal will do for Silver Fern. What will it do for PGG Wrightson? Well, here you have to bear in mind a long-term view of the industry and remember that the man at the top of this company is the entrepreneurial Craig Norgate.

If you regard him as the new Ron Brierley, as Sir Ron’s old mate Sir Selwyn Cushing does, then you could look on this deal as the opening gambit of a power play. After winning control of the Silver Fern boardroom his next move is to lure the other South Island cooperative, Alliance, into a merger, during which he will allow his company to be bought out at a handsome profit.

If Alliance spurns such blandishments, he could launch a takeover instead. That’s much harder to do if the shareholders don’t actually hold tradeable shares. But Alliance is troubled by a dwindling supply of stock in the dairy-rich deep south and would be hard-pressed if a procurement war broke out.

He has a third option: to stay in a new Silver Fern- Alliance company and await further opportunities down the road. And they will come. There’s a mood for change in the industry – the failed Alliance mega-merger plan at least showed that the other meat companies were willing to talk about restructuring. It’s so much more painless when you can rationalise – meaning close meat plants and lay off workers – if you can do it in concert.

Before all this can happen there’s one immediate hurdle to jump. It’s a pretty big one – 75 per cent approval of Silver Fern’s shareholders. Almost all will be South Island farmers, a pretty fractious bunch of late.

They’ve been upset about Silver Fern’s prevarication over the mega- merger but now they know why. Maybe they’ll see the intervention of Mr Norgate as the price they have to pay to get the merger back on track. But then, losing control of their company for $5 extra a lamb may be too high a price for them. Time will tell.

Of course, Alliance could launch a pre-emptive strike and make a rival offer for Silver Fern. That would give the shareholders something to really think about.

The possible ramifications of this deal are enough to make your head spin. Another is the procurement situation. Combined, Silver Fern’s and PGG Wrightson’s stock-buying workforce will be more than 350. Will there be enough work for them all? And what about the contracts that PGG Wrightson now has to procure for other processors, such as Bernard Matthews and Progressive? The company says it will continue to fulfil them, but what happens when stock is in short supply? Its priority will surely be the company that it owns half of.

Stock throughput is any processor’s lifeblood. Bills have to be paid. Silver Fern’s debt will be transferred to PGG Wrightson’s balance sheet, but it will borrow to fund the deal and will need the cashflow.

Another issue for the wider industry is the trust it now has in Silver Fern. All the big companies, along with Meat & Wool New Zealand, backed the Meat Industry Taskforce, set up to find a strategy for an industry beset by tough trading times. The taskforce collapsed late last week when it lost the support of a key player, publicly unnamed but widely believed to be Silver Fern.

It would be unsurprising to find the other members of the taskforce do not hold Silver Fern in high regard. Which could be a problem for the industry’s hopes for expanding meat sales outside the main markets of Britain, Europe and United States. This depends on cooperation, but Silver Fern has not been very cooperative lately.

Again, Mr Norgate may be key to resolving this. His business acumen is widely admired by the companies.

If he decides to make a long- term commitment to the new-look Silver Fern he could smooth over the hurt feelings.

A lot depends on him. Is he there for the long haul or just passing through?

He says it all.

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