Alliance Group independent director Mark Wynne expects the co-op’s farmer-shareholders to back a proposal from Dawn Meats. Photo / Supplied
Alliance Group independent director Mark Wynne is confident the co-op’s farmer-shareholders will support Dawn Meats taking a majority stake in the meat processor, despite the emergence of a last-minute competing bid.
The proposal to buy 65% of the co-op for $270 million goes to a vote at a meeting in Invercargill on Monday and a result is expected the next day.
A group of farmers said on Thursday they have secured “credible alternatives” to prevent the sale to Dawn Meats, a family-owned meat company based in Ireland that serves Britain and Europe.
The group said it had secured options to keep Alliance 100% New Zealand farmer-owned and urged fellow shareholders to vote against the Dawn Meats’ deal.
The alternative plan involves capital contributions from shareholders, some considered asset rationalisation and debt repayments via profits.
Southland farmer Jeff Grant said Alliance had worked through significant restructuring over the past 18 months.
“What we’ve been saying all along is that we think the company was put up for sale at the lowest point in 74 years driven by the pressure of its longer-term and mid-term debt, created through the actions of the board,” he told the Herald.
The cash-strapped co-op – New Zealand’s biggest sheep meat exporter – has until December 19 to repay $188m in bank debt.
The Dawn Meats proposal needs a majority of over 50% of all the shares (105 million) and 75% of the total that are actually voted to proceed.
Alliance has done farmer roadshows across the country about the Dawn Meats proposal.
“It’s pretty hard to gauge the exact percentage [of support],” Wynne said.
“I would say we have got it, and it’s for the main reason that farmers told us last year.”
Alliance, facing mounting debt and low product prices, tried raising capital last year but failed.
“They told us earlier this year – reinforced at the roadshows – that they don’t have the appetite to put more capital back into Alliance and that they can get a better return on the capital on their farm,” Wynne said.
“My guess is somewhere between 10% and 15% would vote ‘no’ and I think the rest have indicated loud and clear that their intention is to support the Dawn Meats investment.”
Wynne said the $188m of bank debt owing was a significant amount, “and it’s overdue”.
If the Dawn Meats proposal goes through, New Zealand’s top three meat companies will be either wholly owned or partly owned by foreign companies.
In 2016, the then cash-strapped Silver Fern Farms formed a joint venture with China’s Shanghai Maling, receiving a $267m cash injection in the process.
In 2017, Japan’s Itoham Yonekyu Holdings went from a 65% stake to full control of ANZCO.
Alliance has long highlighted its New Zealand farmer ownership.
On the prospect of becoming foreign-controlled, Wynne said: “My personal opinion is that it comes down to shareholders’ choice.
“And, the current shareholders are indicating they don’t wish to put in more capital, in neither the amounts nor the time frames that are available.
“We did 44 meetings around the country [last year] and said if we don’t get the shareholder support then we would go to the external market and look for capital.
“So that’s what we’ve done.”
If the deal is successful, Dawn Meats will have three of the five directors on the board.
To balance it up, there are veto rights or minority rights, officially called “board reserve matters”.
There are 20 “board reserve matters” that have been locked into the joint venture, which require both parties to agree on an issue.
“So the decision-making for the vast majority of all decisions that the board will make behaves as a 50-50 joint venture, but the equity is 65-35.”
Ironically, sheep meat and beef prices have increased significantly over the past 12 months or so.
“The fortunes of the red meat industry – and farmers will know better than anyone – are highly volatile,” Wynne said.
He said the timing of last year’s capital raise was “terrible” as farmers were doing it tough with low prices.
“This year, they are doing really well, but having just completed 22 roadshows with 1000 shareholders, the message is still the same.
“Yes, they’re back in much better times, but they still prefer to put their capital into their farm investment and not into the processor.”
This time last year, farmers were getting paid $6 a kilogram for lamb compared with just under $11/kg today.
Beef prices have improved by a similar magnitude.
“In the US, after a number years of drought and bad conditions, they’ve got the lowest cattle numbers in 75 years, so they’re hoovering in the imports and that’s driving the world price sky high again.”
Agriculture co-ops are no strangers to capital problems.
“Technically, a co-op needs to keep a very strong balance sheet because at the time that you need capital and, therefore, you go to your farmer suppliers, they are usually doing it hard in the same business cycle.”
The timing of required capital raises tends to be when neither the farmer nor the co-op has the free cash available.
“The second point – and [dairy co-op] Fonterra has been leading the charge on this for well over a decade – is what they call redemption risk, and it is the underbelly of the co-operative model in a declining market.”
Redemption risk is when farmers decide to exit the sector and cash in their shares, which can put stress on the balance sheets of the co-ops having to pay them out.
“We used to have in New Zealand 70 million sheep and now we’re at 23 million and still declining.
“When your raw material is declining like that there is redemption risk where shareholders want out and the company can’t raise capital.
“In the good times and rising markets and even steady markets, co-operatives are just fine.
“But in a declining market, it puts a lot of stress on the capital structure of the model.”
In Alliance’s case, the co-op had spent tens of millions on upgrading equipment to meet new safety standards across seven sites.
An upgrade of its biggest plant, Lorneville, also came at a significant cost.
Then the co-op spent $84m on a new computer system at a time when there was not the profitability to cover it.
“I guess the takeout, if you look back, would be we should have done a capital raise when we had some very good years.
“And that’s the irony of the system.
“In a good year, you actually need to raise the capital because the underbelly is you can’t raise it in a bad year.”
Dawn Meats was in the frame when Silver Fern Farms was having its capital adequacy problems and looking for partners.
The Irish company, which is owned by three families, has been an Alliance customer for a decade or so.
“They’ve always had an interest in the southern hemisphere supply so that they can have northern and southern supply continuity for their customers around the world.”
In terms of the competing offer, Wynne said the first principle of it was that the banks would offer a three-year extension on the overdue debt.
“As of last week, when we checked in, that’s certainly not going to happen,” said Wynne, former chief executive of Ballance Agri-Nutrients.
“The second one is that it assumes that farmer-shareholders will put in capital voluntarily over the next three years in quite significant amounts.
“Our surveys and our feedback from farmer shareholders is that the very vast majority of them have no willingness to do that.”
There has long been overcapacity in New Zealand’s meat processing capacity and shutting down plants is expensive.
He said the market was squeezed because there was too much capacity competing for declining numbers of livestock.
Alliance closed its Smithfield plant at Timaru last year at a cost of $48m.
“That is why companies don’t rush to the door to take the capacity out because it costs so much money.”
The board unanimously supported the Dawn Meats move.
“The alternative, or a no vote, looks pretty dark, and so it’s a really key decision for our shareholders and we just encourage them all to actually vote and have their say.”
Alliance’s problems follow an all-too-familiar pattern in New Zealand agribusiness.
In 2019, China’s Yili bought West Coast dairy co-op Westland Milk as it was about to disappear under a mountain of debt.
Last year, China’s Bright Dairy went to majority ownership of NZX-listed Synlait Milk as it underwent a major recapitalisation to restore its ailing balance sheet.
At the end of this month, Fonterra’s farmer shareholders will vote on a move to sell its Mainland consumer business to France’s Lactalis because it had not delivered what the co-op considered an adequate return on capital.