Brian Gaynor writes that most agriculture companies have been delisted after struggling.
One of the main problems with the New Zealand sharemarket is that the agriculture sector, which is our major export earner, is woefully underrepresented.
There are only four main board-listed agriculture companies - Affco, Allied Farmers, NZ Farming Systems Uruguay and PGW Wrightson - with a combined market value of just $850 million or 1.5 per cent of total sharemarket capitalisation.
By contrast, agriculture represents 40 per cent of the country's export earnings and this does not include horticulture or finished food products. The situation has become worse over the past few decades.
Thirty years ago, there were 23 listed agriculture companies comprising nine rural servicing companies, six meat companies, five engaged in wool or hides while the remaining three were involved in fertilisers, seeds and farm ownership.
Most of these companies have disappeared because they were unable to develop a successful business model and their profitability and sharemarket performance was poor.
The current bunch has similar characteristics, as demonstrated by their sharemarket returns figures in the accompanying table.
The four companies have had an average negative return of 58.3 per cent over the past two years, even though agriculture commodity prices have boomed and the benchmark NZX 50 Gross Index was down only 0.01 per cent over the same period.
The average sharemarket return for the four listed agriculture companies over the past few years has been a negative 46.9 per cent. This excludes NZ Farming Systems Uruguay, because it didn't list until December 2007.
Given the poor performance of these companies, it is not surprising that two of them have been subject to a takeover offer while the other two have undergone substantial changes over the past year or so.
Affco was established in 1903 but took a big leap forward in 1986 when it bought two freezing works from R&W Hellaby and a further six plants from Waitaki International four years later. These purchases, financed mainly by debt, were a disaster and the 1995 IPO and NZX listing share float was a recapitalisation of the group.
The Talley family first acquired a shareholding in mid-2001, increased this in 2002 and 2003 and reached 50.01 per cent under a partial offer at 39 cents a share in 2006.
The family made a full takeover offer on July 20 this year, when it owned 52.8 per cent of Affco.
There are four important thresholds as far as control of a company is concerned. These are:
* Any party is free to acquire up to 20 per cent of a listed company but once it passes 20 per cent it is required to make an offer to all shareholders;
* Under this offer, a bidder must reach 50 per cent and if it does not reach this figure it must return shares to accepting shareholders so that it goes back to no more than 20 per cent;
* A 75 per cent shareholding gives the controlling shareholder significant authority, because this is the level required to pass a special resolution at a shareholders' meeting;
* Once a bidder reaches 90 per cent it can move to compulsory acquisition, which allows it to obtain full 100 per cent control.Talley now has 84.6 per cent of Affco and has extended the offer until November 2. The independent directors have recommended acceptance and will be accepting in respect of their own shareholdings.
It looks as if Talley will reach 90 per cent and move to compulsory acquisition.
If Affco is delisted, this will be the first time in living memory that there will be no meat or hides/leather companies listed on the NZX.
Allied Farmers was established in 1913 and listed on the NZX in 2002. The company began to expand its finance portfolio aggressively in 2006, with the purchase of Prime Finance. This was followed by the acquisition of Nationwide Finance in 2007, Speirs Finance in 2008 and the assets of Hanover Finance last year.
This strategy proved to be a disaster and the company has been one of the worst-performing NZX stocks in recent years.
The irony of NZ Farming Systems Uruguay (NZS) is that PGW Wrightson believed it could create a successful Uruguay-based listed company when most of the listed entities involved in the New Zealand agriculture sector have been unsuccessful.
The second mistake was that NZS's strategy was based on buying cheap Uruguayan farm land, yet it aggressively bought expensive land during the 2008 land price bubble.
Singapore-based Olam made a takeover offer for the company in July, which closed yesterday. As of yesterday morning, Olam had 67.1 per cent.
A number of shareholders have criticised the directors' recommendation, particularly in respect of their own shareholdings.
Chairman John Parker wrote on September 2: "In respect of their own holdings in NZS, directors would note that the circumstances of each director are different and not uniform. Accordingly, some directors may elect to sell some or all of their shares in to Olam's offer, and other directors may elect to retain all their shares."
Directors have made the following announcements to the NZX:
* Craig Norgate has accepted in respect of 600,000 (97.6 per cent) of his 615,000 shares;
* Graeme Wong has accepted in respect of 55,000 (37.9 per cent) of his 145,000 shares;
* Andrew Clark, NZS's chief financial offer, has accepted in respect of 65,000 (100 per cent) of his 65,000 shares.
The remaining directors, who have yet to announce to the NZX in respect of the Olam offer, have the following shareholdings: Murray Flett has 10,411,738 shares; chairman John Parker 480,000 shares; John Roadley 50,000 shares and Keith Smith 20,000 shares.
It is surprising to see Norgate accept in respect of a large percentage of his shareholding, as he was the driving force behind NZS and has always been extremely optimistic about its future prospects.
It looks as if Olam will acquire more than 70 per cent of the target company and NZS will remain listed on the New Zealand sharemarket. It will be interesting to see if Olam develops a profitable strategy regarding the Uruguayan farms.
PGW Wrightson, which is the only large agriculture-based company remaining on the NZX, has had a long and volatile history as it has tried to develop a successful business model.
Wright Stevenson was established in 1865 and listed on the sharemarket in 1906. It merged with National Mortgage and Agency in 1972 and became part of Fletcher Challenge in 1981. Fletcher Challenge floated it on the NZX in 1993 as a separate company.
It has undertaken a large number of mergers and reorganisations since then, with its latest, under Craig Norgate, being a near-death experience.
The recently released annual report shows that the company has undergone further significant changes over the past twelve months. Norgate is gone, Sir John Anderson is the new chairman and Agria of China is now the largest shareholder with 19.0 per cent.
The directors believe that PGW Wrightson is finally "on the right path" but "short- and medium-term business conditions in the rural sector are expected to remain muted".
The big question is: has PGW Wrightson finally established a successful long-term strategy or are we going to have to wait for a Fonterra listing, in some form or other, before investors have the opportunity to participate in an agriculture company with a robust, profitable and sustainable long-term business model?
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.