One giant step - then a stumble

Craig Norgate

Just over a year ago, Craig Norgate and his allies were celebrating the launch of PGG Wrightson, the company which merged farm services and supplies businesses Pyne Gould Guinness and Wrightson.

They sold the merger by telling shareholders it would increase returns and efficiency, and provide more power to invest in innovation.

But the new operation has been having teething troubles.

Its shares were listed on October 7 last year at $2.15 and have been as high as $2.45 in the past 12 months.

But last night they closed at $1.72, and have been as low as $1.62.

Merger benefits of about $10 million were achieved in the year to June, and are likely to be better than expected.

But net profits before one-offs undershot projections by $10 million - or 33 per cent - amid tougher times for farming generally.

Some farmers have gone to other firms because they didn't like PGG or Wrightson or they wanted to help maintain competition.

The merged company acknowledges it had lost market share in its livestock business in Otago, and in wool and rural supplies in the lower North Island. This hasn't been helped by rivals poaching staff.

And the sharemarket is wary about the company's exposure to a farming industry threatened again by the high New Zealand dollar.

But Norgate, a PGG Wrightson director, says he's not worried by scepticism from analysts or institutional investors.

If local institutions weren't interested in buying shares "that's their prerogative ... we're not out courting them", the former Fonterra CEO said.

Norgate - who set off the events that brought PGG, Wrightson and Williams and Kettle together in the merged entity - also points out that American investor Capital Group has a 5 per cent stake.

The share price had fallen only because of light trading and would quickly pick up if anyone tried to buy a significant stake, he said.

Of anyone dissatisfied with the way things are going, Norgate says: "We're pretty relaxed about those that are grumpy because they're probably not the sort of people that are in this game for the long-term anyway.

"So those on the register are pretty darn happy or they wouldn't be there.

"And it is not about what we've done in 12 months. It's about what we do in the next two to three years."

He says the PGG Wrightson story is still in its early stages.

"We're only in the first couple of chapters ... all we've really done inside the company is crunch the companies together, make the changes that needed to be made and drop the merger synergies to the bottom line. But there hasn't really been any value-add."

Annual profits were down less than might have been expected in light of the farming industry's tough times, he said.

And the company says it's been regaining some of the lost market share and gaining staff from other companies.

But Norgate - whose family has a joint 30 per cent stake with the McConnon clan through Rural Portfolio Investments - acknowledges: "This is the year where we've got to get some runs on the board in terms of proving that those merger benefits have hit the bottom line."

So, what do farmers, competitors, analysts and institutional investors think of PGG Wrightson a year on?

Some local institutional investors and analysts have misgivings about buying the stock because of farming's volatility and the share price.

Most farming leaders spoken to by the Weekend Herald said they hadn't noticed much of a difference in farm services and supplies since the merger.

Grains Council chairman Andrew Gillanders, who farms at Darfield in Canterbury, said rationalisation had lead to seed varieties being discontinued, which had upset some farmers.

Most cropping farmers were waiting to see how PGG Wrightson came through the January-February harvest period before making up their minds about it.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said: "For most farmers it's business as usual."

But John Loughlin, chairman of listed North Island farm services and supplies company Allied Farmers, said traditional loyalties had been skewed by the merger, and farmers had been shopping around more for supplies.

"I think farmers have tended to look for competitive pricing on more items as a result of those new dynamics," he said.

Brett Esler, the CEO of South Island company Combined Rural Traders, which sells rural supplies, agrees competition has increased.

"If the merger was driven by a desire to reduce competition in an over-serviced market, the reverse has happened."

Norgate agrees margin contraction is evident in rural supplies. Overall, he says, PGG Wrightson believes farmers have saved between $15 million and $20 million because of the increased competition caused by the merger.

His chief executive, Barry Brook, puts the savings at between $10 million and $20 million.

Australian companies Elders Australia and Landmark have bought into the New Zealand businesses Elders NZ and RD1.

Norgate says this had no effect on PGG Wrightson.

"If we're asleep at the wheel, then they'll have some fun. But we didn't bring the three companies together to be asleep at the wheel."

Chris Kelly, CEO of the country's largest corporate farmer, Landcorp, believes the farm services and supplies business is over-supplied, and he welcomes more rationalisation to cut costs.

Dairy supplies specialist John Lea, the chief executive of RD1, is another talking about further consolidation. "Whether we get down to the Australian situation where you've got two players with more than 50 per cent of the market, I'm not sure."

But he believes New Zealand could become a two to three-company market.

Elders NZ says it is the second biggest stock and station company and has started opening merchandise stores.

It is aiming to increase its market share and exploit its link with Elders Australia.

Managing director Stuart Chapman sees the PGG Wrightson merger as having created opportunities for Elders to expand into areas previously serviced by two of the merged entities.

"New Zealand needs two national players," he says.

Chapman is another who believes New Zealand will eventually have two or three main farm services and supplies businesses and some peripheral ones, as happened in Australia.

He thinks potential for rationalisation involves bigger firms picking off smaller fringe ones rather than big amalgamations.

Norgate agrees. "We've got what we want in terms of critical mass and the ability to deliver."

On the issue of using the merged entity to create more value than merely synergy benefits, Norgate said PGG Wrightson moved out of "merger mode" only in the last quarter.

Its plans for a $100 million-plus project to buy and develop farms in Uruguay, revealed last month, was the first "genuinely innovative" thing to come out of the industry in a long time.

He is not giving too much away over what other new plans the company has. But he says a recent strategy exercise showed "the range of opportunities is even greater than we thought 12 months ago".

The bulk of those opportunities were in New Zealand.

Norgate also said the merger had created an opportunity for growth in financial services to clients. The finance loan book at the end of the financial year was up nearly $57 million or 20 per cent on the combined books of PGG and Wrightson a year earlier.

Brook sees the finance business as having a role in the consolidation of agriculture into bigger farms.

And he says PGG Wrightson must pay close attention to increasing specialisation in all agricultural areas.

"We've got to have the people and the systems to facilitate and encourage our customers to keep on improving their productivity growth."

There was strong potential for the seeds business to deliver new products which increased meat and milk yields.

While Norgate believes rural spending has bottomed out, he is worried about the strength of the dollar continuing to hurt the economy.

"Quite a hard landing is in store for the economy if the dollar stays where it is, and people really haven't picked up on this."