China investment eats Silver Ferns' debt mountain

William Rolleston Federated Farmers. Photo / Dean Purcell

Silver Fern Farms says $261m Chinese input will help meat processor forge ahead with growth strategy

Shanghai Maling Aquarius, an offshoot of China's state-owned Bright Food, has emerged as a contender for a half stake in Dunedin-based Silver Fern Farms by offering to invest $261 million in the company.

Silver Fern chairman Rob Hewett said the deal would make the meat processor debt-free by the end of the year and put its value-added strategy on a stronger footing.

Hewett said the deal would enable Silver Fern to once again pay dividends and rebates to its farmers, who have suffered the effects of poor returns over the past few years.

Silver Fern's debt problems date back to 2012 and 2013 when the market for sheepmeat collapsed, leaving the company with millions of dollars of inventory and a debt mountain - the combined effect of which was to create a handbrake on its growth prospects.

China is Silver Fern's biggest market. In beef alone, sales to China have grown from $15 million in 2011 to $170 million this year.

Evidence of Silver Fern's "plate to pasture" value-added strategy - as it tries to move away from commodities-based sales - can be seen on New Zealand supermarket shelves already.

"I don't think that there is any doubt that our strategy is the right strategy," he said. "We have just lacked the right capital structure to support it."

Federated Farmers president William Rolleston said farmers needed to carefully consider their options.

"Our message to farmers is - don't write this off but don't accept it without analysis."

The move would give the company increased scale and the ability to operate more deeply in the international market place, he said.

"On the other hand, the farmer shareholders need to look at this very carefully and decide if a joint venture is really what they want the future of their company to be," Rolleston said. "It's clear that we have been talking about industry game changers for the last 10 years and nothing has emerged. This is an opportunity that has emerged and we need to take it seriously."

Key questions include what value has been placed on Silver Fern Farms' significant body of intellectual property and whether a strong emphasis on the Chinese market will prove restrictive if that market weakens, he added.

Allan Richardson, who with other farmers has pushed for Silver Fern Farms to look more seriously at merging with neighbouring Alliance Group before allowing foreign investment in the co-op, said it was still not a done deal.

"We are disappointed that they have decided to engage with Bright Food," Richardson said. "From our point of view, it still has to be voted on by farmers and farmers need to be aware of the long term implications if we lose control," he said.

"This is not just a cornerstone investment - this is a loss of farmer ownership and control."

Shanghai Maling is 38 per cent owned by the state-backed Bright Food - China's biggest food company.

Bright Food has 800 "hypermarkets" across China and 8000 stores in the People's Republic.

The deal is subject to approval from the Overseas Investment Commission and Chinese regulators - a process that is expected to take six to nine months.

Hewett said the move was a "watershed" moment for the company and for the meat industry, which has for years struggled with issues of overcapacity, under-investment, intense competition for stock and low returns.

The company had been seeking a $100 million capital injection to strengthen its balance sheet before bank debt falls due next month.

Silver Fern hired Goldman Sachs to look at its capital structure late last year.

Silver Fern's potential infusion of capital comes at a time of profit turnaround for the company - it said last month it was on track for 2015 full-year earnings before interest, tax, depreciation and amortisation in the range of $75 million to $85 million.

In yesterday's deal, the board said it planned to redeem the 5.5 million Supplier Investment Shares it has outstanding and pay a $35 million (30c a share) special dividend to ordinary and rebate shareholders at the time of the transaction.

The implied value of the transaction of $2.84 per ordinary share compares to a share price of 35c when the trading of shares was suspended in July, it said.

Hewett said the company considered many options for new capital, both locally and internationally, but Shanghai Maling stood out.

"What is clear is that the traditional industry model hasn't consistently delivered for farmers or processors over a sustained period of time," he said.

"Our shareholders and farmer suppliers believe in our added value strategy, but the key missing link has been a strong financial position from which to execute."

Bright Food has a 51 per cent stake in South Island milk processor Synlait through its unit, Bright Dairy & Food.

Rights issue 'did not measure up'

Rob Hewett (right), with chief executive Dean Hamilton, said several options were considered. Photo / ODT

Silver Fern chairman Rob Hewett says the company canvassed a number of opportunities before teaming up with Shanghai Maling.

A last-minute bid to underwrite a rights issue was spurned by Silver Fern Farms, and neighbouring Alliance Group revealed yesterday that it had made a play for the company before it had announced it was looking at raising more capital last year.

South Island businessman John Rodwell confirmed to the Herald this week that a number a agribusiness companies had clubbed together with an offer to underwrite a rights issue, initially worth $40 million, aimed at Silver Fern's farmer shareholders.

Silver Fern Farms said the $40 million was insufficient. The group then went back with a higher offer but had since "not been able to connect with the company".

Hewett confirmed there was an underwriting proposal from the agribusiness consortium.

"We canvassed a number of opportunities when we were evaluating the options and there was a late-breaking underwrite proposal that received some attention. At the end of the day, while it was a good number, it did not measure up to what we got with Shanghai Maling," Hewett said.

"It materially turbo-charges our strategy from day one," he said. "It's got - subsequent to getting over the line with shareholder approval - support from our banking syndicate, which is a game-changer."

Separately, Silver Fern's southern competitor, Alliance Group, said that it had submitted a bid for Silver Fern Farms (SFF) before the company's capital-raising process getting under way last year.

"Alliance Group's board and senior management have worked hard to engage with Silver Fern and discuss opportunities for industry consolidation with them," said chairman Murray Taggart.

"We have evaluated the potential for a merger with, or the acquisition of all or part of, Silver Fern on many occasions over the last 10 years."