Fran O'Sullivan: Seeds of doubt in Chinese bid for PGW

Wrightson director Keith Smith and co have shed little light on what Agria/New Hope intend to bring to the table. Photo / Martin Sykes

The Chinese-backed bid for 50.01 per cent of PGG Wrightson is really all about getting control of what happens to the rural services company's most undervalued asset - a seeds business that Agria believes could ultimately be leveraged to become a multinational rival to America's Monsanto.

This is the real game plan behind the play that Agria and its new partner New Hope have launched with an opportunistic move while the PGG Wrightson share price is depressed.

And it is also the reason why the New Zealand Government must investigate exactly what Agria and New Hope bring to the table before they make a decision on whether to allow the partial takeover to proceed.

More particularly, the range of conditions that should be imposed on the Chinese bidders (if they succeed) to ensure that New Zealand's valuable horticultural seed stocks remain a prime asset that can further the growth of our own agriculturally intensive nation.

That the Chinese bidders are thinking big is a given.

Agria's Xie Tao ("XT") is a smart cookie. He is fundamentally a deal-maker.

XT also thinks strategically, an attribute he shares with former PGG Wrightson chairman Craig Norgate, whose own ambitions for the company were swamped by a tsunami of debt as the global financial crisis hit home. Trouble is none of those who have to assess the bid on the shareholders' behalf seem to be able to divine what's going on in XT's head.

It's instructive that neither PGG Wrightson's trio of independent directors - chairman Sir John Anderson, Keith Smith and William Thomas - nor Grant Samuel, which issued an independent report to shareholders, could shed any light on what Agria/New Hope intend to bring to the table once they gain control of the company.

As far as Grant Samuel goes, the advisory firm's assessment of Agria's bid to gain control over PGG Wrightson contains so many winks and nods that even the most wilfully blind shareholder ought to have no problem opting to keep their shares as a "hold". More of which later.

But the independent committee of directors' target statement is masterful in its understatement.

The trio state Agria has said PGG Wrightson's business requires restructuring and a refocus on the core businesses. Agria and New Hope have advised that they intend to take an active role in developing a new strategy for PGG Wrightson to improve operations and profitability.

"How this will be achieved has not been determined, but Agria has committed to working with the incoming managing director to achieve a turnaround of PGG Wrightson's performance ... There is of course, no certainty that Agria will achieve its stated performance enhancement aspirations.

The extent of New Hope's future involvement in PGG Wrightson is unknown. The committee believes that New Hope is an entity with a large Chinese agricultural business backed by significant financial resources, and there is potential for PGG Wrightson to benefit from what New Hope may bring to bear through its investment in Agria.

"This potential benefit remains an unknown quantity, at this time."

In other words shareholders, we haven't a clue about the motivations or long-term game plan of the very investors we brought in to provide financial stability for the company in late 2009 when it desperately needed capital.

Surely not?

You have to dig deep into Grant Samuel's report before reaching the pivotal sentence: "It is likely that PGW's substantial seed business is the primary attraction to Agria."

In its analysis of PGW, the advisory firm points out that its seed business is the largest Southern Hemisphere supplier of commodity and proprietary forage seed predominantly to New Zealand, Australia, South America and various other international markets.

Its product range includes grass seeds, seed treatment products, forage legumes, forage brassicas, herb seeds, pea seeds and turf seeds.

It is a market leader in New Zealand in forage, brassicas and turf, in Australia in proprietary and commodity forage products and a strong presence in South America through various investments in Uruguay, Argentina and Brazil.

PGW's seed products are focused on improving overall farm productivity and performance.

On average New Zealand farmers re-pasture every 20 years.

But PGW management estimates that optimal pasture activity could be achieved if New Zealand farmers moved to a 10 year re-pasturing cycle. (In other words you could double the business - my words not Grant Samuel's).

Grant Samuel goes on to say the business is also involved in the turf seeds market in New Zealand and Australia for application in sports grounds, parks and lawns.

In November 2010 PGW completed the acquisition of the assets of Keith Seeds Pty Limited - an Australian pasture seed, food grade pulse (peas, beans, lentils) producer and seed processing and cleaning business based in South Australia.

The Seeds division is supported by a strong research base and commercialises new products through internal research and development, breeding and evaluation programmes and joint venture research partnerships.

The seeds business has a number of proprietary seeds that provide superior margins. In addition it has a large number of new cultivars in development.

But having deduced that the seeds business is the prime value attraction for Agria, the advisory firm fails to apply the kind of dynamic analysis that would give shareholders an indication of the value that particular business would have for PGW itself if strategically leveraged further on the world stage.

Frankly, it is difficult to understand why the PGW directors could not extract more information from Agria on this score. Its two directors on the PGW board are business savvy - not Beijing-style apparatchiks. They do not appear opaque.

But the PGW directors are right on the button to point out that the company's underlying trading performance is expected to improve as commodity prices flow through to rural property values and a reduction in debt burden for that sector.

And to note that Pyne Gould's decision to sell all of its 19 per cent holding to Agria - at a price that the two players set for the partial offer - has more to do with funding its own commercial motivations elsewhere.

What we do now know is that the Chinese bidders consider PGW's finance book to be irrelevant to the long-term future of the company.

Pointedly, Grant Samuel noted there is no evidence Agria (which has two directors on the PGW board) has had any material impact on PGW's performance, or that the Chinese firm would on its own add any significant added value to the company and that its Chinese activities appeared to be relatively limited when compared with New Hope which is a very substantial company with extensive agricultural interests.

Ouch.

What Grant Samuel does not say is that Agria is purely a front - or intermediary - for New Hope. But given that the Chinese company ponied up the capital for PGW when it was on its knees in late 2009 and has held the shares until an appropriate Chinese player was ready to move, the inference is clear.

And judging by the speed with which Canadian player Agrium has gained the independent board committee's approval to do its own due diligence prior to launching a 100 per cent takeover, Sir John, Smith (who has made some frosty comments to media) and Thomas are quite uncomfortable with the Agria play.

Irrespective of whether Agria gets over the line, as far as New Zealand's strategic "national interests" are concerned PGG Wrightson is of much higher importance than the 20 Crafar dairy farms that so exercised the public last year.

PGW is a key NZ asset that should stay under New Zealand control - not pass into Canadian or Chinese control.

It's time for NZ Inc to swing into action: the NZ Super Fund, Fonterra (which looked at this asset earlier on), Landcorp and a few fellow travellers should surely be able to mount a spoiler bid.