Too late for merger talks

Events have overtaken any ideas Silver Fern Farms and the Meat Industry Action Group have about a merger between SFF and Alliance Group.

The prediction that the sheep kill will be down by 9 million this season changes everything.

Even without that, although there were good reasons why SFF might to merge with Alliance, the case for Alliance joining SFF was much weaker; and something MIAG seems not to understand is that directors are legally required to act in the best interets of the company.

But now sheep numbers have dropped so steeply the meat industry is entering a new era.

There will have to be more works closures and job losses not only in the freezing industry but in allied areas such as shearing. That will be difficult for the many people involved but there is a silver lining to this cloud for sheep farmers because decreased supply is coming while demand is rising and that will mean better prices.

SFF lost any opportunity it might have had for joining others in the industry when it pulled out of discussions over Alliance’s plan for a mega merger. It now has its hopes set on shareholders accepting PGG Wrightson’s proposal to take a 50% stake in the company and says it there is no plan B.

But if that plan isn’t accepted SFF will have to come up with another, and the letter Alliance directors has sent to shareholders makes it clear it has its own plan which don’t involve either SFF or PGW.

In a strongly worded letter, Alliance chair Owen Poole pours cold water on both SFF’s desire to reopen merger discussions and its proposal to allow PGG Wrightson to take a 50% stake in the company.

He wrote, in response to one SFF chair Eion Garden wrote to Alliance shareholders, and lists the arguments against the PGW proposal and SFF advances.

 Poole’s letter follows the break:

Dear Shareholder

I am writing in response to a letter sent to you by the Chairman of Silver Fern Farms. We understand that support for the PGW/SFF partnership is uncertain among SFF shareholders and promotion of a subsequent merger with Alliance Group is being used to encourage their support.

The letter is self-serving, and was sent without our knowledge. While Alliance Group is commencing a series of meetings this week to discuss industry matters with shareholders and suppliers, it is important I write to you directly regarding issues raised in the SFF letter.

While the PGW/SFF partnership is largely a matter for SFF and its shareholders, Alliance Group has reviewed the “Summary of Business Case” and found –

• of the suggested benefits, $41.9 million is proposed from “enhanced supply profile – consisting of increased stock volumes through Silver Fern Farms and resulting processing efficiency”. This can only be achieved by PGW taking livestock for the benefit of SFF that is currently procured by other meat companies. Transferring stock from one processor to another processor will not provide any net benefit to farmers. All companies will seek to retain their existing market share;

• only $600,000 in-market benefit is anticipated. This equates to less than 5 cents per lamb shared between farmers and PGW;

• the benefits to farmers are less than certain but the one-off costs of $17-$25 million are likely to be real;

• the business case highlights that SFF is behind the rest of industry in many areas. Most of the themes they promote as new can be found in Alliance Group’s “Securing the Future” document published in 1997. Alliance Group shareholders are very familiar with a “pasture to plate” strategy. Initiatives such as “Farm Assurance” programmes, Yield Grading, the Central Progeny Test programme, annual supply commitments and product branding have already provided Alliance Group suppliers with market information and superior returns for many years;

• the procurement model positions PGW as a third party trader guaranteeing them procurement fees in addition to their share of profits earned by SFF;

• farmer control is lost. While PGW cannot exercise control, neither can farmer directors under the governance structure;

• it is clear the principal benefit to SFF is the injection of capital into the company.

Because of our concerns with the business case, Alliance Group is not attracted to a merger with PGW/SFF. The business case for merger is poor with the risks unacceptable to Alliance Group shareholders. In addition, a merger of Alliance Group and SFF –

• would require sale of some plants in the South Island to competitors to secure Commerce Commission consent;
• would not lead to industry consolidation to achieve 80%. Other companies have moved on with their own strategies;

• would not generate any material gains in the market. Many large customers purchase from multiple suppliers to maintain competitive pricing. Those customers would reduce supply from a merged company and increase supply from a competitor. Too much supply remains outside a merged company to prevent this from occurring. A merged 50% of the industry is not large enough to influence the market place. Our industry is littered with similar amalgamations that did not deliver.

EU quota figures show SFF has lost market share of 30% for lamb and 20% for beef since commencing the Richmond takeover. Their right-sizing programme to date has yet to fully address this loss of volume, let alone provided for any forecast decline in stock numbers.

Much of SFF’s claimed debt reduction arises from a $300-$400 million fall in SFF’s revenue over the past five years, as a consequence of market share loss. In short, SFF is a smaller business than it was, but still has excess assets.

Alliance Group is not proposing to close any capacity because it has already “right-sized” for the market. The company has closed out 19 slaughter chains in the South Island since the acquisition of Waitaki International. A merger at this time would result in Alliance shareholders funding this process all over again for the benefit of SFF shareholders.

As a single transaction, the 80% Concept model addressed all of these issues. Unfortunately, the window of opportunity for the Concept has closed.

We have no doubt a merger could be beneficial to SFF. We have been approached by SFF to discuss the prospects of a merger between PGW/SFF and Alliance Group. We have serious concerns with the business case and cannot see those concerns being satisfied.

Alliance Group favours a 100% co-operative, supplied by farmer owners, with growth and aggregation to match support and market demand. The most certain and cost effective method of aggregation is for farmer owners to support their co-operative with all their business.

The primary focus of your directors is on what is beneficial to Alliance Group shareholders, both in the short and long term. If benefits can be generated from mergers or other structural changes, be assured your directors will make those recommendations to shareholders.

I encourage your attendance at the company’s annual series of shareholder and supplier meetings over the next two weeks where we can discuss these issues further. The timetable has been sent to you previously and can also be found on the company’s website (www.alliance.co.nz), or you can contact your Alliance Group representative.

G O POOLE

One Response to Too late for merger talks

  1. Ed Snack says:

    Hm, the best solution is for SFF to collapse now, leaving the remaining operators right sized for the remaining supply. The farmers lose nothing, their cooperative shareholding is already commercially worthless as it can’t be traded, however the banks take a fair sized bath. This of course presumes that a significant proportion of their plants are closed for good.

    The bit about SFF doing poorly overseas is about correct IMHO, they’ve certainly lots market share and have a relatively poor reputation. As I’ve pointed out before, they have also been the one major supplier prepared to compromise significantly on price. Another source of their reduction in debt is from reducing inventories, from cutting prices as much as anything else. Too many egos in the way still, though.

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