Alliance Group chairman Murray Taggart says any merger with Silver Fern Farms risks making a "big beached whale" of the New Zealand meat industry because its rival needs the capital offered by China's Bright Food just to rationalise plant capacity and reduce its debt burden.
Bright Foods' Shanghai Maling Aquarius unit has offered to invest $261 million cash in Silver Fern Farms (SFF) to become a 50-50 partner with the Dunedin-based meat company in a deal that would leave the business debt free and with funds to upgrade plants, spend more on marketing higher-value meat products and provide a new route into China.
The injection of funds has stoked speculation a stronger SFF could subsequently dictate terms for a tie-up with Alliance, something the two firms have failed to achieve in a decade of sporadic talks. Alliance says it made an offer before SFF embarked on its capital-raising process and had "worked hard to engage with SFF".
SFF has called the Chinese deal an industry game-changer and sector consultant Keith Woodford says it would leave Alliance more vulnerable, with its own surplus capacity in sheep meat. But Taggart says Alliance has already made progress upgrading and rationalising capacity, such as mothballing its Sockburn site in Christchurch and closing its sheep meat operation at Mataura. By contrast, SFF has more work to do in trimming capacity, he said.
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"Unfortunately, the fact is when a company has been under a bit of financial pressure they don't upgrade plants," Taggart said. "A lot has to be spent on SFF plants. It's a commonly held view in the industry they are carrying more plants than they should."
The pro-merger lobby of farmer shareholders at both meat companies wants "a step-change in competitive position, but we'd still be a pipsqueak in the global market, and in New Zealand could be the big beached whale of the industry," he said.
SFF has 22 meat processing plants to Alliance's eight sites, but by Alliance's estimate is killing only a third more stock, "meaning they are carrying a heap more overhead per kill than we are," Taggart said. Repaying debt was only one issue for its rival, he said.
SFF lifted sales by 16 per cent to $2.28 billion last year but finance costs of $37.5 million contributed to a small net profit of $474,000, compared with a loss of $28.6 million a year earlier. Alliance's 2014 sales rose 5.3 per cent to $1.46 billion, while it paid interest of $10.5 million and reported a net profit of $6.2 million.
SFF has made its deal with Shanghai Maling subject to approval by 50 per cent of shareholders who will vote at a special meeting on October 16.
It also requires clearance from the Overseas Investment Office, whose recommendation that Shanghai Pengxin's $88 million purchase of Lochinver Station be approved was rejected by the Government.