Craig Norgate's firm repeated the mistakes of the failed companies of the 1980s

The Rural Portfolio Investments receivership is a sad end to the existing 14-year partnership between Craig Norgate and the McConnon family.

The collapse is a mirror image of many of the failed structures of the 1980s, which were also based on rapid expansion, too much debt and not enough equity.

Rural Portfolio has been a loss-loss situation for all involved as the major players have had their bank balances and reputations severely dented while investors in PGG Wrightson, NZ Farming Systems Uruguay and the Rural Portfolio redeemable preference shares have lost large sums of money.

The story begins in 1994 when Craig Norgate, who was just 29, was appointed chief executive of the Taranaki dairy co-op, Kiwi Co-operative Dairies. During his tenure Kiwi's revenue grew from $300 million to $3.9 billion.

In 1997 Kiwi acquired a shareholding in Mainland Products from the Dunedin-based McConnon family and Norgate joined the Mainland board. Mainland, which was founded by Peter McConnon in 1954, was involved in fresh and processed milk, cheese, Kiwi Huttons processed meats and Tip Top ice cream.

In October 2001 Kiwi and The New Zealand Dairy Co-operative Dairy Company merged to form Fonterra and Norgate was appointed chief executive of the new dairy giant. After the merger Fonterra raised its Mainland shareholding from 83 to 100 per cent.

In 2005 Fonterra sold most of the Mainland businesses to Graeme Hart but Fonterra continues to own the Mainland cheese brand.

There has been speculation over the price paid by Kiwi and Fonterra for Mainland with a figure of $600 million being reported. This seems too high.

However, there has been a close relationship between Norgate and the McConnon family since 1997 and Mainland played a major role in Kiwi's growth while Norgate was chief executive.

Norgate was dumped by Fonterra in July 2003 and a few weeks later, on August 6, he formed Rural Portfolio Investments (RPI) with the McConnon family. RPI's two directors were Baird McConnon, who was chairman, while Norgate was managing director.

On September 23 RPI announced that it was offering to purchase up to 19.9 per cent of Wrightson at $1.45 a share. The press release stated that "the McConnon family has linked up with the Norgate family formerly of Taranaki for this investment.

After 16 years in high profile senior management positions Mr Norgate has decided not to re-enter active company management but will instead manage his private business interests".

RPI purchased 12.9 per cent of Wrightson and on April 6, 2004 it made an offer to raise its stake to 50.01 per cent at $1.50 a share. The offer, which was increased to $1.65 per share, was successful and RPI ended up with 50.01 per cent of Wrightson.

RPI was 50/50 owned by the Norgate and McConnon families with the two parties investing $20 million each in RPI ordinary and Class A redeemable preference shares.

The most interesting, and controversial, aspect of RPI's partial takeover of Wrightson was its funding, with Norgate and the McConnon family supplying $40 million of equity and an additional $85 million was raised from the public on the following basis:

$42.5 million in the form of $1 redeemable preference shares that matured in April 2007.

$42.5 million of $1 redeemable preference shares maturing in April 2009.

Dividends paid on these redeemable preference shares would be sourced from dividends paid by Wrightson.

The RPI prospectus stated that Norgate had signed a management agreement in September 2003 whereby he would provide management services to "Rural Property Investments for a five-year term for management fees of $500,000 plus GST (if any) per annum plus reasonable direct expenses".

Wrightson began its roller-coaster ride shortly after RPI gained majority control. In October 2005 it merged with Pyne Gould Guinness and RPI's shareholding in PGG Wrightson, the new merged company, fell to 30.0 per cent.

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

In October 2007 Norgate was appointed chairman of PGW and Tim Miles became CEO four months later.

Meanwhile the Uruguayan company continued to expand at a breakneck speed and on June 30, 2008 PGW announced it would acquire 50 per cent of Silver Fern Farms for $220 million.

The September quarter 2008 was a disaster for PGW and NZFSU as they both tried unsuccessfully to raise new funds.

The quarter ended on a sombre note when PGW told the NZX at 5.05pm on September 30 that "the settlement for the proposed acquisition of a 50 per cent interest in Silver Fern Farms will not take place".

This was a huge embarrassment as was the announcement a few days earlier that PGW would acquire 14 million NZFSU shares at $1.50 each from RPI and Murray Fleet, a PGW and NZFSU director.

The Uruguayan company's share price was only $1.36 at the time, although this transaction was later cancelled.

From that day on it has been all downhill for investors in PGG Wrightson and NZFSU.

Investors in the Rural Portfolio structure have also suffered. The structure is incredibly complex, has poor disclosure and should never have been promoted to retail investors.

The nub of RPI is that investors were repaid the first $42.5 million in April 2007 from the proceeds of a new public offering.

This was a further $60 million of redeemable preference shares sold to outside investors.

The second $42.5 million was repaid in April 2009 from additional borrowings of $25 million from financial institutions with the remainder coming from the McConnon family.

RPI is now in receivership but the financial institutions have been repaid their $25 million.

RPI has assets worth approximately $30 million to support the last tranche of $60 million of redeemable preference shares issued to the public.

It appears that Norgate has lost his original $20 million and the McConnon family are down $40 million, comprising the original $20 million, an additional $10 million of equity and loans of $10 million.

However Norgate has been quoted as saying he hasn't lost anything so he may have had an undisclosed put option to the McConnon family whereby they have been forced to take the $60 million of shareholder losses associated Rural Portfolio Investments with public investors taking an additional $30 million hit.

Nearly $1.0 billion of investor wealth in PGG Wrightson, NZ Farming Systems Uruguay and Rural Portfolio Investments has been destroyed since mid-2008.

These huge losses should not have occurred because Norgate and the McConnon family are experienced business people with good track records. However they repeated the same mistakes as many other New Zealand entrepreneurs, namely they expanded far too rapidly with too much debt and not enough equity.

In addition they had weak boards of directors, they expanded NZ Farming Systems Uruguay far more rapidly than indicated in the prospectus, there were too many related party transactions and the Rural Portfolio redeemable preference shares should never have been sold to the public.

Wealth creation shouldn't be too difficult, particularly in a long-established rural-based company, but our business leaders continue to shoot themselves - and outside investors - in the foot through complex corporate structures, having too much debt and a reluctance to appoint strong independent directors.

* Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management.