New era or just paying SFF’s debt?

July 6, 2008

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.


Two works down…

May 19, 2008

There are no surprises in today’s announcement that PPCS is closing its Burnside venison plant in Dunedin with the loss of 138 jobs.

 

The age of the plant was one of the factors counting against it and PP chief executive Keith Cooper said it had been losing millions of dollars.

“Tightening New Zealand and European food safety regulations make the continued operation of export meat processing facilities at Burnside increasingly problematic as all areas on site, even those not used for food processing, must be maintained to specified standards,” Mr Cooper said.

“In addition, the modern blast freezers used for venison processing require a large section of now-obsolete conventional cold storage to be frozen down, which incurs significant ongoing electricity costs.”

Mr Cooper said sheep and lamb numbers were expected to drop by two million in the South Island next year and national deer numbers were forecast to drop from 736,000 to around 500,000.

“The forecast seriously impacts on the ongoing viability of the venison and (lamb and deer) skin processing operations at Burnside,” he said.

It’s been a horror month for employment in Dunedin with 430 jobs lost through Fisher and Paykal’s closure of its Mosgiel plant and a further 50 jobs lost with the closure of Tamahine knitwear.  

The announcement will also be making staff at other freezing works nervous. PP announced the closure of its Orinigi works with the loss of 446 jobs last week  and there may be more to come.

Owen Hembry points out that PP with 24 plants, including Orinigi, has as many plants as Alliance with 8,  Affco (10) and ANZCo Foods (7) combined.

In fact Alliance and Affco, which has previously restructured, have both said they have no plans to rationalise.

So the pain is going to fall mainly on PPCS but as the saying goes, no pain no gain – and what comes out the other end will undoubtedly be a leaner, fitter company.

The cost of redundancies at Oringi – which employs 466 people with an opportunity for about 100 to be relocated within the company – will be about $14 million to $15 million with operating cost savings of about $15 million a year.

A fitter PPCS will have another card to play – a good geographic and product spread.

One of the reasons Alliance didn’t want to merge with PP was the overcapacity of PP works. These closures will change that, but PP may also feel that having bitten the bullet it is in the best interests of the company to continue on its own.


Sheep numbers down but prices may go up

May 17, 2008

The ODT reports that 120 meat workers at PPCS’s Burnside works have been called to a meeting on Monday. The expectation is they’ll be told that the venison processing will move to the Finegand plant in South Otago. This follows  last Monday’s news that the company’s Oringi works will close. 

 

In between the two announcements was another from Mataura Valley, a new dairy company, saying it plans to build a $90 million milk drying plant near Gore. Reactions were mixed with a warning that too many companies competing for markets could lead to prices being under cut as they have been in the sheep industry.

 

However, farmers facing the expense of converting to dairying will be tempted by the fact they don’t have to buy shares as they do with Fonterra; and the increase in cow numbers is expected to continue. Around 100 Southland sheep and beef farms converted to dairying for the new season and a similar number is predicted to convert for the 2008-09 season.

 

The scale of conversion has altered the South Island landscape. Visitors used to marvel at the number of sheep, but while driving from North Otago to Balfour a couple of weeks ago what struck me was how few sheep I saw. My impression was confirmed by yesterday’s release of 2007 stock numbers from the Stats Department which explain why meat works are closing and milk plants are opening.

 

Last year’s drought and numerous dairy conversions have led to a 3% drop in sheep numbers from 39.6 million in 2002 to 38.5 million last year. North Island sheep numbers dropped 5%: from 19.5 million in June 2006 to 18.5 million last year – just 100,000 more than in 2002.

 

The South Island still has more sheep than the North, but the numbers have decreased more too: there were 19.9 million last year, 6% fewer than 2002. The decline was steepest in Canterbury where they dropped 8% to 7.2 million and Southland down 5% to 5.7 million.

 

Beef numbers dropped 2% from 4.5 million to 4.4 million in the five years to June 2007. At the same time dairy cows increased 31% in the South Island, from 1 million to 1.3 million with a small increase of just 22,000 to 2.9 million in the North Island.

 

The drop in sheep numbers signals there may well be hard times ahead for meat workers and their communities as over capacity forces PP and possibly other companies to “right-size”. But there are encouraging signs for meat producers. We’re not the only country with a decline in sheep numbers. The drought has taken its toll on flocks across the Tasman too so the supply is down while the world demand for protein is growing. Beef prices are already at record highs in the USA; and the falling dollar will also help boost prices, not just for meat. Pelts and wool have been at rock bottom levels so even a small lift in returns from them will help farmers’ incomes too.

 

 


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