Fran O'Sullivan: Act now to save the seeds of NZ's future

The seeds business was PGG Wrightson's most undervalued asset. Photo / Supplied

COMMENT: Cabinet Ministers should direct the Overseas Investment Office (OIO) to step in and call an immediate halt to the overseas sale of PGG Wrightson's seeds division and force the company's major shareholder to disgorge its holding.

Any way you look at it, selling PGG Wrightson's "crown jewels" to Danish company DLF Seeds for $421 million is simply an asset strip of the NZ rural services firm.

It's one that stands to benefit the fortunes of former chairman Alan Lai — whose reputation is comprehensively shredded following a settlement this week by PGG Wrightson's 50.1 per cent shareholder Agria Corp with the US Securities and Exchange Commission (SEC) — and whose company will clearly benefit proportionally from a non-taxable distribution of available subscribed capital to shareholders potentially totalling up to $292m after the sale.

Better that the Lai-led Agria is now forced to disgorge its own shareholding — and preferably to an NZ Inc. consortium including, for instance, players like the NZ Super Fund, Fonterra (which earlier looked at the asset), Pāmu and others — rather than see the valuable seeds business march out the door.

The grounds are there.

In one of those egregious deals that are only too common in the regulatory sector, Lai has agreed to pay a US$400,000 ($583,000) penalty and be barred from acting as a director or officer of a public company for five years for manipulating prices in Agria's NYSE-listed shares.

The settlement with the SEC followed claims that the agriculture investment firm hid losses from investors through fraudulent accounting and overstated the value of its New York-listed stock.

In New Zealand, PGG Wrightson (PGW) has already gained shareholder approval for the Danish sale and has noted the $421m figure exceeds the book value of PGW Seeds' net assets (estimated at $285m).

This is frankly irrelevant.

To recap, the SEC's investigation triggered the OIO to investigate whether Agria and its principals continued to meet the "good character" test necessary to pass foreign investment hurdles, given its controlling stake and directorships of Wrightson.

It shouldn't take Einstein-like heroics to persuade the OIO that Agria and Lai have comprehensively failed that test.

In my view, this is clear grounds for the OIO to go back to the drawing board: force Lai and Agria to disgorge their own shareholding immediately for failing the good character test and invite the Financial Markets Authority to dig in and assure itself that PGG Wrightson's public statements during Agria's time as majority shareholder do pass muster.

This is doubly important given the conflicting stories Lai has told over Agria's plans for PGG Wrightson since the Chinese company first bought a 13 per cent stake in what is NZ's largest rural services firm for $36 million in 2009.

The NZ authorities are not bound to save Agria's financial bacon.

But they are required to ensure probity in our markets and enforce the principle that foreign investment in New Zealand is a privilege and not a right.

As I wrote at the time that Agria moved to majority control of PGG Wrightson, irrespective of whether it got over the line, as far as New Zealand's strategic "national interests" are concerned, PGG Wrightson was of much higher importance than, say, the 20 Crafar dairy farms.

My investigations in China and interviews with Lai and other Agria principals led me to the conclusion that the bid for 50.01 per cent of PGG Wrightson was about getting control of what happened to the rural services company's most undervalued asset — a seeds business that Agria believed could ultimately be leveraged to become a multinational rival to America's Monsanto.

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

Along the way, Agria talked large of listing the seeds business on the Hong Kong exchange (fat chance in my view, given Agria's reputation) and merging PGG Wrightson's seeds business with Agria's Chinese seeds operation to form a new company to compete with the "giants like Monsanto".

"If we integrate the New Zealand seeds business with Agria Seeds we will have a business that can go global," Lai told me.

My arguments that conditions should be imposed on the Chinese bidder, to ensure that New Zealand's valuable horticultural seed stocks remain a prime asset that can further NZ's growth, were ignored.

Buried deep in a Grant Samuel report at the time was the pivotal sentence: "It is likely that PGW's substantial seed business is the primary attraction to Agria."

In its analysis of PGG Wrightson, the advisory firm pointed 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 an NZ market leader in forage, brassicas and turf, in Australia in proprietary and commodity forage products and has a strong presence in South America through investments in Uruguay, Argentina and Brazil.

On average, New Zealand farmers re-pasture every 20 years. But PGG Wrightson management estimated that optimal pasture activity could be achieved if farmers moved to a 10-year re-pasturing cycle. (In other words, you could double the business — my words, not Grant Samuel's).

Having deduced that the seeds business was the prime value attraction for Agria, the advisory firm failed to apply the kind of dynamic analysis that would give shareholders an indication of the value that particular business would have for PGG Wrightson itself if strategically leveraged further on the world stage.

The Danes got the picture, which is why their offer is priced well above book value.

When Agria originally bought into PGG Wrightson — essentially to save the the company's bacon and its debt-ridden prime shareholders — a co-operation agreement was formed under which, according to the OIO, the parties agreed "to take certain steps in relation to agricultural research and development, investment and establishment of various joint-ventures internationally".

On the R&D front, a Grasslands Innovation Shareholders Agreement was signed, increasing the PGG Wrightson Seeds ownership to 70 per cent and consolidating all "our grass and legume breeding into this joint venture".

What I find disgraceful is the fact that the seeds business was built on the back of public good research in New Zealand, and instead of being leveraged here it is being sold off.

If the relevant Cabinet Ministers do actually care about NZ maintaining control of its strategic assets, they should insist the OIO does its job and forces Lai and Agria to disgorge.