KEY POINTS:
It had all the hallmarks of a great marriage - mutual attraction and admiration, plus a willingness to co-operate and plan a future together - and yet the partnership of PGG Wrightson and Silver Fern Farms may be headed on to the rocks.
In June last year NZX-listed
rural services business PGG Wrightson agreed to buy half of meat-processor co-operative Silver Fern Farms for $220 million.
The deal was promoted as creating a supply chain stretching from pasture to plate and a platform for industry rationalisation, with prospective short- and long-term gains of more than $60 million and up to $110 million a year respectively.
However, things started to unravel in September when PGG Wrightson, unable to finalise bank credits, missed the first instalment of $145 million, and in November Silver Fern Farms called it a day and terminated the agreement.
Initial talk after the deal fell through was of ongoing co-operation to look at alternative ways forward - the wedding day didn't happen, but perhaps the parties could still set up home together.
PGG would need to pay some compensation for failing to turn up at the church, but that could wait until later.
It all seemed pretty friendly and with good reason, because these two big hitters of the agricultural industry didn't want to miss out on the prospective benefits that saw them catch each other's eye in the first place.
Then last week PGG Wrightson made a move on the question of what the compensation should be - $10 million against Silver Fern Farms' claim and a settlement based on delivering the benefits that would have been achieved by the original deal.
The $10 million included $3.5 million for costs incurred by Silver Fern Farms and an ex gratia payment in addition to benefits from a procurement agreement.
PGG Wrightson chairman Craig Norgate says his company has put forward a compelling proposal to achieve the objectives and provide redress for the non-completion of the share purchase.
"This is focused on future co-operation between the companies, particularly in procurement and other aspects of an integrated meat-industry supply chain."
Cue the flying crockery.
Silver Fern Farms chief executive Keith Cooper says PGG Wrightson is being antagonistic in playing negotiations out through the media, the $10 million is totally unacceptable and the situation could quite likely end up in litigation.
Cooper says PGG Wrightson is suggesting it can deliver benefits under a supply arrangement.
"Well, there was no supply arrangement, there was one package deal of a shareholding," Cooper says.
"Any agreement without the shareholding is merely a commission arrangement where they continue to clip the ticket which is at farmers' costs."
It sounds like time to start going through the record collection, but despite the strong language, Cooper stopped short of saying last week's events would damage the relationship between the two companies.
"I wouldn't say damage; it's particularly unhelpful to read a proposition contemporaneously in a press release."
An olive branch perhaps.
SHARE PLUNGE
The stoush with Silver Fern Farms has been just part of PGG Wrightson's headache this week, with problems at Fisher & Paykel Appliances and Nuplex setting the stock market's bowels quivering.
The level of debt at all companies has become a chief concern as the global economic crisis begins to be felt more on these shores.
PGG Wrightson's debt has been a concern in the market, which combined with the public falling out with Silver Fern Farms and growing general fear sent the share price tumbling.
The share price crashed 54.6 per cent last week, closing down 71c for the week at 59c on Friday, and wiping $207.7 million off the company's market capitalisation.
Macquarie Research Equities noted in December it was increasingly concerned about the rate at which PGG Wrightson's debt was rising. Core debt was likely to approach $400 million this financial year, refinancing of $180 million in debt was needed by April and there was an increasing risk the company would need to undertake a diluting equity raising.
Questions are being asked about why PGG Wrightson went unconditional on the Silver Fern Farms deal without the funding absolutely secure, and whether the liability could end up being more than $10 million.
Many of the questions hanging in the air will get answered this week, with PGG Wrightson's half-year result due on Thursday.
With the result just days away, Norgate's hands are pretty well tied on what he could say, but perhaps keeping his head down also shows he is not panicking.
A panicking company might have issued a slew of releases about how things are not that bad - solid history, good customers, workforce skills, tough times, long-term plans and so on.
And lest we forget, PGG Wrightson last August did report a 29 per cent rise in full-year revenue to $1.22 billion and an 80 per cent rise in net profit to $73.2 million, although the company said a more comparative measure of profit excluding capital gains, one-off items and a new earnings stream from NZ Farming Systems Uruguay, was up 35 per cent to $39.2 million.
The company has a profitable history.
In December the company said net earnings this year were likely to be within a range of $39 million to $45 million.
A flat result would not be bad in a global recession, although the world is changing week by week, making a few months between forecast calls suddenly feel like an age.
Heading off on a tangent, a plummeting share price does make a takeover of PGG Wrightson look considerably cheaper, provided one can get the backing.
Rural Portfolio Investments, a Norgate joint venture with Otago's McConnon family, owns 30 per cent of PGG Wrightson and has first refusal on the 21.6 per cent of shares held by Pyne Gould Corporation should that company decide to sell.
Pyne Gould intends progressing towards being a bank and as a result would look to exit its interest in PGG Wrightson in line with the Reserve Bank Act.
Pyne Gould managing director Brian Jolliffe says: "We've been in the rural services business for 150 years. We are very, very supportive of PGG Wrightson, and there is no hurry for us to sell our shareholding. We will be acting in the best interests of our shareholders and PGG Wrightson in any exit we make."
If and when Pyne Gould sells, and should Rural Portfolio take up its right to buy the shares, that would give Norgate and his associates a fairly healthy takeover launch pad of 51.6 per cent.
Norgate's role in the consolidation of the rural services and dairy industries shows he likes a bold play, and perhaps an unlisted PGG Wrightson might suit his opportunistic approach to growth.
