Farming Systems bid sends shares up

PGG Wrightson set up NZ Farming Systems to develop dairy farms in Uruguay. Photo / Supplied

Shares in dairy farm operator NZ Farming Systems Uruguay rose sharply yesterday following a takeover bid by multibillion-dollar Singapore-listed Olam International.

Olam increased its stake in NZ Farming Systems to 18.45 per cent in May and yesterday launched a takeover bid for all shares at 55c each, sending the stock soaring 29 per cent to close at 53c.

NZX-listed rural services business PGG Wrightson set up NZ Farming Systems to develop dairy farms in Uruguay and has entered into a lock-up agreement to sell its 11.5 per cent stake to Olam.

PGG Wrightson spokesman Brent Melville said the $15.5 million that would be raised by selling the shares was not essential.

"Obviously it is a 'nice to have' as we can use it to reduce debt. We can use it for a number of things, we don't need it operationally at all," Melville said. "I would say that we believe in the future of it but at this moment in time it's opportune for us to divest our shares if we have the opportunity to do so."

PGG Wrightson chairman Sir John Anderson said the sale of shares would not impact on a close working relationship with NZ Farming Systems.

"[PGG Wrightson] provides a range of agricultural products and services to rural customers in South America through its South American base in Uruguay, and we will continue to utilise that infrastructure to maintain an ongoing supply and advisory relationship for [NZ Farming Systems Uruguay]," Anderson said.

NZ Farming Systems recommended shareholders wait for a target company statement, which would include an independent appraisal report, before making a decision on Olam's offer.

NZ Farming Systems has said it needed to raise about US$60 million ($84 million) to complete the development of the company and that it could issue bonds in Uruguay, bring in new equity and sell dry stock farms.

Forsyth Barr analyst John Cairns said the company was a long-term asset which was still in its development stage.

"How do you go about valuing something like that?" Cairns said.

"There are obviously reasonable risks surrounding the development, one of which of course is access to capital to fund the balance of it, and there's also obviously the risks surrounding just the implementation of actually carrying out the development."

There had been a change in governance of PGG Wrightson, Cairns said.

"A dairy conversion development is by its very nature a long-term asset and I guess the new governance has determined that that's not a particular field of endeavour that is appropriate for [PGG Wrightson] to pursue."

NZ Farming Systems, based on input costs, including land and labour, looked a bankable undertaking on paper, Cairns said.

"But it terms of where they wanted to be they're certainly behind ... and that's partly due to the drought conditions and also the freezing up of capital markets."

PGG Wrightson shares closed up 3c yesterday at 50c.

WHO'S WHO

NZ Farming Systems Uruguay

* Set up by PGG Wrightson to develop dairy farm operations in Uruguay.

* Floated on the NZX in 2007.

* Milk production forecast this year of about 68-72 million litres.

* Forecast earnings before interest and tax loss of a maximum US$10 million ($14 million) for the financial year.

Olam International

* Supply chain manager of agricultural products and food ingredients listed on the Singapore exchange in 2005.

* Direct presence in 64 countries, supplying more than 10,600 customers.

* Businesses include cocoa, coffee, cashew, sesame, rice, cotton and wood products.

* S$7.5 billion ($7.7 billion) of revenue for the nine months ending March 31.

The offer

* Olam is offering 55c a share for all of NZ Farming Systems, which values the company at $134.3 million.

* Offer is conditional on having more than 50 per cent of the voting rights and consent under the Overseas Investment Act 2005.