China investment to end sniping: Hewett
Silver Fern Farms believes it will be able to "unleash" its red meat marketing strategy if farmers agree to a new business partner, writes Tim Fulton.
Damaging talk about Silver Fern Farms’ debt should come to an end once Shanghai Maling is aboard, says chairman Rob Hewett.
"It fixes our capital structure once and for all. Perennially we’ve had comments made about us in the marketplace. This should shut it up.".
SFF’s proposed partnership with Shanghai Maling would clear the company’s $288m of debt, pump the new business with equity and allow business to "unleash" its strategy, says the South Otago farmer and former Shell oil executive.
"It ticks the co-op box, it ticks the shareholder box and it allows our plate-to-pasture strategy to be enhanced."
Debt would be gone by the end of this financial year, dumping SFF’s current annual debtservicing cost of $37m. The company would also now be able to chop the amount of seasonal bank finance it needs for supplier payments.
Hewett hints the co-operative had overhauled some of its financial systems before Shanghai Maling came knocking as a business partner.
"Our internal processes have been a lot more rigorous in terms of managing our risk position."
Chief executive Dean Hamilton had been driving that process out and the work had been "consolidated" by staff changes.
As outlined this week, a controlling Silver Fern (SFF) company entity owned 50:50 by SFF co-operative and Shanghai Maling would each put up $261m of equity to start the new venture.
Shanghai Maling is a listed company on the Shanghai stock exchange. It is part of Bright Foods group, which through another company has 38 per cent share of the NZX-listed Canterbury dairy exporter, Synlait Milk.
Hewett says the new cash coming to SFF in the partnership would change the company’s prospects forever.
SFF directors had decided unanimously Shanghai Maling’s energising potential could not be ignored.
SFF had hired investment bankers Goldman Sachs to investigate new investment options. The search was extensive and considered potential funders from New Zealand and offshore.
"What we see in front of us (Shanghai Maling) is unquestionably the best opportunity that’s been put in front of Silver Fern Farms," says Hewett.
Hewett talked at a media conference on Wednesday about a "gap to bridge" from the existing $288m of debt to less than $100m by the end of its current financial year.
The company had recovered from the harsh 2012/13 season when global sheepmeat prices collapsed. In that year, it lost just over $28m, after a loss of $31m the season before.
In 2014, on a profit of $500,000, SFF paid down $99m of debt.
Back then, the company said its priority was winding back debt and improving its equity ratio of 45.2 per cent. This was better than just over 39 per cent in 2013, but well behind just over 56 per cent in the 2011 financial year.
Hewett says the 2012/13 market slump had put SFF and the industry in a challenging financial position, but the company had been "working its way out" of that spot.
"We have recovered and we have been making gains."
This year’s performance has been very good, particularly in sheepmeat, he says.
Still, the company had other important goals, such as adding more value to its export products.
"We’ve been running with the handbrake half on. We’ve been doing as good a job as we can, which has been exceptional, but we haven’t done everything that we wish to do."
The company was about to "unlock its constraints", with more cash to market its branded products and to improve the performance of its plants.
Hewett says a financially flush SFF would not be an invitation for suppliers to hold out for much higher livestock payments. The "unleashing" of SFF’s value would be in the marketplace, where consumers decided what they were prepared to pay. The company would keep working with farmers on breeding and the like to get the right "added value" product on shelves.
Hewett is adamant SFF would keep processing and marketing red meat as usual. "In terms of the business itself, as it stands today, nothing changes."
Governance would change, though. The proposed partnership will be run by a 10-person board made of five co-op faces and five Shanghai Maling representatives.
The remodelled business would return share capital to existing suppliers and company investors.
Shanghai Maling had valued SFF at $311m. To set up the partnership, both SFF and Shanghai Maling would put up $261m of equity.
Hewett says it is not a case of Shanghai Maling "buying" into the business. Rather, SFF in its new form would be getting bigger through new cash. "The value, the size of the company is growing."
SFF would "look to" redeem some of its shares, which at the moment were in three baskets. The main share parcel was an issue of about $100m, but the company also had about $15m of rebate shares and $5m of supplier investment shares.
Hewett says SFF plans to buy back the supplier investment shares and pay them out at par value. Alongside this, the company expects to pay a dividend of about 30c a share to all other shareholders.
To bridge the gap between the $311m valuation and the $261m of injected equity, $50m would be taken back from the existing SFF "operating accounts" and put it into the co-operative. Another $7m would also be set aside for running the greater number of new governing boards for the partnership. These running costs usually include elections, running board meetings and director fees.
A SFF share on Unlisted was valued at 38c when the company imposed a trading halt nearly two months ago. After remodelling, a tradeable SFF share would be valued at $2.80 per share, Hewett says.
After set-up, SFF would consist of an operating company, Silver Fern Farms Ltd, which would be half owned by Silver Fern Farms Co-operative, and half owned by Shanghai Maling.
Shareholders would still own supplier shares and half of the SFF partnership as a "significantly increased entity." Supplier shareholders would get significant "value accretion," Hewett says.
SFF will go to shareholders with its proposal at coming roadshow meetings. The key will be how they respond to the idea of a new look SFF.