Olam takeover promises much-needed Farming Systems capital

A worker on one of NZ Farming Systems Uruguay South American farms. Photo / Supplied

Olam International, the Singapore-based food and ingredients conglomerate, holds the prospect of much-needed capital for NZ Farming Systems Uruguay, whose expansion was thwarted when the global financial crisis froze credit markets.

Olam has entered into an agreement to purchase PGG Wrightson's 11.5 per cent stake in NZFSU, subject to regulatory approval, and is making a full takeover offer on the same terms.

The integrated global supply chain manager has offered 55 cents apiece for the shares of NZFSU it doesn't already own, a 34 per cent premium on its last traded price of 41 cents, valuing the target at $134 million.

Forsyth Barr equities analyst John Cairns said it will take two or three weeks for an independent appraisal report on the merit of Olam's bid, and could take months after that for it to obtain the necessary number of shares to complete an outright purchase and takeover.

"NZFSU is a long-term project, which under its original plans was to produce something like 300 million litres of milk a year," Cairns said. "To date, they're doing something like 70 million litres a year."

An investor such as Olam has access to other capital lines, and that this may ultimately be to NZFSU's advantage. "This is the early stage, watch this space," Cairns said.

NZFSU last year managed to raise US$30 million through the sale of bonds in Uruguay having postponed its capital raising plans in October 2008.

NZFSU is currently farming just under 11,000 hectares and milking almost 20,000 cows. The South American dairy farm developer was set up in 2006 to export New Zealand's intensive dairy farming techniques. As well as a struggle to raise debt funding, drought in Uruguay cut milk production.

The company issued a 'don't sell' notice today, pending an independent appraisal of Olam's offer. NZFSU said it is "well advanced in negotiations with Wrightson about internalisation of the management agreement" under which it could buy back the management contract from Wrightson and enter a long-term preferred supplier deal.

Wrightson said it would continue to provide asset management and investor relations services to NZFSU under a five year management contract entered into in Nov. 2006, according to its statement.

"The sale of our equity interest in NZFSU would not impact on its close working relationship with NZFSU which has been fostered since its inception in 2006," said Wrightson chairman John Anderson.

Anderson said Olam's stated intention to support the capital requirements of NZFSU was good news for the South American company, allowing it to complete its planned investments and support its growth trajectory.

"We view the ongoing relationship between NZFSU and PGW as an important part of that, as PGW is an efficient supplier of farm inputs and services required by NZFSU," Anderson said.

Olam has been actively seeking to add to its food production assets. In 2008, it acquired 25 per cent of Dairy Trust, the owner of cheese maker Open Country Cheese.

Olam operates an integrated supply chain for 17 agricultural products and food ingredients in 60 countries.Temasek Holdings, which has a holding in GuocoLeisure, the company once known as Brierley Investments, owns about 14 per cent of Olam. Kewalram Chanrai Group owns 36.7 per cent and managers of Olam hold about 16 per cent.

The Asian inroad into the nation's primary sector was also swelled last year when Agria, the China-based seed and agricultural research company, became the largest shareholder in Wrightson, with a 19 per cent holding, after participating in Wrightson's capital raising, which diluted some existing shareholdings, including that of Pyne Gould Corp.