Brian Gaynor: Agria offer has warning flags up - again

PGG Wrightson bid by little-known firm echoes tumultuous RPI era PGG Wrightson shareholders need John Palmer back at the helm or a full takeover offer. Photo / Paul Estcourt

The partial offer for 50.01 per cent of PGG Wrightson by Beijing-based Agria is yet another indictment of our corporate governance standards.

The bid is distressing because Agria is taking advantage of PGG Wrightson's low share price, Chairman Sir John Anderson and his fellow directors Keith Smith and William Thomas have given in far too easily and Agria is a totally unproven entity.

The offer has similarities with a Bank of New Zealand bid nearly 20 years ago when the directors made a mess of that company and then threw in the towel when National Australia Bank (NAB) made an opportunistic offer.

The only obvious differences are that NAB made a full takeover of BNZ, whereas Agria is making a partial tender, and NAB resurrected our iconic bank whereas there is no evidence that Agria can perform any better than Craig Norgate did at PGG Wrightson.

Wright Stevenson was established in 1865 and listed on the sharemarket in 1906. It merged with National Mortgage and Agency in 1972 and was renamed Challenge Corporation.

In 1981, under the leadership of the late Sir Ron Trotter, it combined with Fletcher to form Fletcher Challenge but was floated back on the NZX in 1993 as Wrightson.

The company's big change event occurred in late 2003 when Rural Portfolio Investments (RPI) acquired a 12.9 per cent stake. RPI was a joint venture between former Fonterra chief executive Norgate and the Dunedin based McConnon family.

The following year RPI made a controversial offer for 50.01 per cent of Wrightson at $1.50 a share.

The problem with partial offers is that shareholders are asked to give effective control to a majority shareholder while still retaining a material stake. Minority shareholders are at the mercy of the controlling shareholder once a partial offer is successful, particularly as far as the future direction of the target company, and the appointment of its directors, is concerned.

This problem should be partially alleviated by Schedule 1, Clause 14 of the Takeovers Code which states that the takeover notice and offer document should contain "a statement as to the general nature of any material changes likely to be made by the offeror in respect of the business activities of the target company and its subsidiaries".

This clause should give existing shareholders some indication of the future direction of the target company while under the control of the new majority shareholder.

RPI's offer for 50.01 per cent of Wrightson gave no indication that the bidder was going to take the company on a high-speed rollercoaster ride although it did state that Norgate and John McConnon would be appointed to the board and RPI intended "to procure a strategic review of Wrightson's business and policies".

On May 13, 2004 Wrightson released the Grant Samuel Independent Adviser's Report, which valued the company between $1.61 and $1.86 a share.

Chairman John Palmer, who is now the highly regarded chairman of Air New Zealand, advised shareholders that the directors assessed Wrightson's value between $1.72 and $1.98 a share and they unanimously recommended that shareholders should not accept RPI's $1.50 a share offer.

Palmer pulled no punches when he wrote: "Even if the offer succeeds, existing shareholders (as a group) will still hold over half of their current shares.

"RPI does not have any plans for how it will add value to Wrightson. We do not believe that becoming a subsidiary of RPI will benefit Wrightson. In fact it may adversely affect the value of the shares retained by existing shareholders."

He outlined a number of alternative opportunities for the company where "a value in excess of $2.00 per share would be possible".

Norgate immediately called a press conference where he slammed the Grant Samuel report and Palmer's recommendation to shareholders.

Palmer replied that "the statements being made and the approach being used by RPI spokesman Craig Norgate smack of 'bully boy' tactics that give a clear and worrying indication of how RPI might manage Wrightson".

RPI raised its offer to $1.65 a share but this was also rejected by Wrightson's independent directors. However RPI received sufficient acceptances to reach its target of 50.01 per cent.

Wrightson began its rollercoaster ride shortly after Norgate and the McConnon family gained majority control.

In October 2005 it merged with Pyne Gould Guinness and RPI's shareholding in the new merged company, renamed PGG Wrightson, fell to 30 per cent.

At the end of 2006 Norgate was appointed deputy chairman of PGG Wrightson. This was shortly after the rural services company had established NZ Farming Systems Uruguay and promoted its IPO.

In October 2007 Norgate was appointed chairman and Tim Miles became chief executive four months later.

In the following 16 months Wrightson imploded as an unconditional offer to purchase 50 per cent of Silver Fern Farms could not be financed and NZFSU failed to achieve its forecast earnings.

Nearly $1 billion of investor wealth in PGG Wrightson, NZ Farming Systems Uruguay and Rural Portfolio Investments was destroyed when these companies were under Norgate's effective control.

At the end of 2009 PGG Wrightson had a nine for eight rights issue at 45c a share. As a consequence Agria Corporation, a Beijing based agriculture group, acquired a 19 per cent stake.

On December 24, 2010 Agria announced it would make a partial offer for PGG Wrightson at 60c a share that would take its holding from 19.0 per cent to 50.01 per cent.

The Schedule 1, Clause 14 requirement referred to above was nearly as vague as in RPI's 2004 offer. Agria said it would seek appropriate board representation, it would have a particular focus on PGG Wrightson's AgriServices and AgriTech businesses and would support the sale of PGG Wrightson Finance's finance book.

Grant Samuel now values PGG Wrightson between 53c and 65c a share and Sir John Anderson's response to Agria's partial offer, which was released this week, was a complete contrast to Palmer's reply in 2004.

Sir John, and his fellow independent directors Smith and Thomas, almost seemed to be saying "the board has made a mess of the company, it is beyond our capabilities to turn it around and the best option is to give majority control to the Chinese in the hope that they can resurrect PGG Wrightson".

The board seems to have run out of ideas as it appointed George Gould, a fellow director, as chief executive even though he is associated with Pyne Gould Corporation which says it wants to sell its 18.3 per cent stake to Agria.

What credentials does Gould, who is described as an investment banker on his company's website, have to turn PGG Wrightson around?

This time around it is Grant Samuel, rather that the independent directors of the target company, that warns about the problems of a partial bid and the inexperience of the bidder.

Grant Samuel wrote that the bid appears "opportunistic", that Agria "has provided little detail regarding its intentions for PGG Wrightson" and "Agria's activities in China appear to be relatively limited".

In addition Agria's share price has fallen from US$8.25 to 87c since listing on the New York Stock Exchange in 2007 and it has a sharemarket value of only $150 million compared with PGG Wrightson's $450 million.

John Palmer, where are you?

PGG Wrightson shareholders desperately need Palmer back at the helm or - as a second best option - a full takeover offer from the other party that is currently undertaking due diligence of the rural services group.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management which holds PGG Wrightson shares on behalf of clients. bgaynor@milfordasset.com