Fran O'Sullivan: Crafar wrangle opens whole can of worms

5:30 AM Saturday Feb 18, 2012

Sir Michael Fay has wasted no time in proving just why Justice Forrie Miller's decision on the Crafar farms has resulted in a "buggers' muddle".

The Fay consortium yesterday said it would inject $4 million more than Shanghai Pengxin to bring the 16 Crafar dairy farms up to scratch, employ more people and increase production above the level pledged by the Chinese buyer.

It's easy for the consortium to promise to toss in $4 million more than the Chinese company when it is offering $30 million less than the market price. This price is about the $200 million mark Shanghai Pengxin is believed to have committed - a figure which is also very similar to the $200 million Allan Crafar has said he can drum up to take the farms out of receivership.

But when local farmers wake up to the fact that the Fay consortium's tactics will ultimately undermine the price of their own farms on the open market the debate will become more nuanced.

If the Overseas Investment Commission had any balls it would have yesterday told the Fay consortium to take a running jump.

OIO manager Annelies McClure should have said her office was going to do what Justice Miller ordered and go back and "recalibrate its existing recommendation" to readdress the substantial economic benefit test against the counter-factual of what a New Zealand investor would bring to the table.

She should not let her office get drawn into what is effectively an auction between Shanghai Pengxin and the very latecomer Fay group over who brings the most added benefits to the table, when only one of those parties will or can be subject to rigorous OIO oversight to ensure they keep to their commitments.

Shanghai Pengxin will have reason to feel pretty aggrieved if the OIO goes down this line.

Last year the Fay consortium submitted an indicative price of $171.5 million for the farms.

Two separate offers were made (both at $171.5 million) but these were conditional on the outcome of due diligence before making a formal bid.

Receivers KordaMentha rejected the consortium's overtures, saying it already had accepted the Shanghai Pengxin bid subject to the Chinese company gaining OIO approval.

The receivers also said the Fay consortium's offer price was too low to be in contention.

If the OIO entertains this bit of nonsense it will open the door for all future foreign bids for New Zealand farmland - and possibly other business assets - to be scuttled by local buyers who aren't prepared to pay market price but will pledge to toss in some optional extras to benefit the local economy.

Here's three other points to consider.

Fay is a client of Westpac which also happens to be the major banking creditor for the Crafar farms. Clearly the bank operates "Chinese walls" between those managing the credit risk on the farm lending side and Fay's commercial banker.

But I can't imagine Westpac boss Gail Kelly - who at a client luncheon last year exhorted the local team to step up the rural business - being less than impressed the bank has to take a multimillion-dollar haircut if Shanghai Pengxin is tossed out.

A 15 per cent discount to open market values (which is what the Fay price represents) would make banks' balance sheets not look too healthy if applied across the $50-60 billion debt in the farming sector.

One isolated incident will not result in this outcome - but clearly there is a potential if the Fay tactics become writ large and bids are decided by legal tactics, not on price.

This all places the Government in a quandary. If the OIO finds itself the ultimate arbiter - not just on offshore bids but also local ones - what happens to vendor rights?

Clearly the Government needs to take independent advice on this - maybe even reconsider appealing the Miller decision in the interests of bring clarity to the investment regime.

John Key will no doubt consider the options. But it is politically charged. Not that this will concern Fay and his consortium.

But if the Shanghai Pengxin bid is jettisoned as a result of such tactics there will be consequences.

Time for mature consideration on an explicit foreign investment regime.