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Silver Fern Farms tells shareholders to "ignore mystery underwrite" as some seek to overturn board's push to partner with Shanghai Maling

Silver Fern Farms tells shareholders to "ignore mystery underwrite" as some seek to overturn board's push to partner with Shanghai Maling

Content supplied by Silver Fern Farms

The recent media statements from shareholder John Cochrane suggesting there is an alternative funding arrangement waiting in the wings should shareholders turn down the Shanghai Maling partnership, is a total unknown and should be treated with extreme caution says Silver Fern Farms.

Silver Fern Farms Chairman Rob Hewett says the board remains unanimous in its endorsement of the Partnership with Shanghai Maling due the significant value it brings to the co-operative.

“The board is unanimous in our support for the Shanghai Maling partnership. It will bring us a secure future as a co-operative which addresses our long-term financial future, supports our global plate to pasture strategy, gives us privileged access to China, the fastest growing red meat market in the world, and provides returns to our shareholders and suppliers,” Mr Hewett said.

“We have met with over 2,000 of our suppliers and shareholders in the last 10 days right around the country. Their support is strongly in favour of the partnership.”

The Board has not been presented with any details of the suggested $100 million underwrite which Mr Cochrane is asking shareholders to back.

“The Board has not received a proposal. We do not know any details, we do not know who the mystery underwriters are, nor who the supposed bank is.

“Going from media reports, the potential underwrite would be significantly disadvantageous to shareholders financially, strategically and very likely from a governance perspective,” Mr Hewett says.

“Mr Cochrane, although well meaning, is playing a very dangerous and irresponsible game in advising shareholders to vote down the Shanghai Maling partnership without providing details of the alternative.

“The Board has considered all available alternatives, has provided shareholders with over 100 pages of detail on the recommended investment in the Notice of Meeting, including an Independent Expert Report from a qualified firm in Grant Samuel.  That Report concludes that the proposed Shanghai Maling investment is both fair and reasonable to Silver Fern Farm shareholders.”

“Mr Cochrane states in the media that under his alternative, suppliers will get to retain control of the company. In the Board’s opinion there is no evidence that shareholders will invest all of the $100m in the company. Based on the last time Silver Fern Farms raised capital from shareholders, we sought over $100m and only raised $22m. Therefore it is misleading to say that supplier shareholder control is retained, as it will be the underwriters that will take control.

“If shareholders do not elect to invest new capital, then the underwriters will own nearly 70% of the company. If shareholders invest a similar $22m as last time, then the unknown underwriters would own 57% of the co-operative.

“There is no visibility as to who these underwriters are; for all we know, a competitor like Alliance could be in the mix.”

“If the underwriters do end up owning such a controlling stake, they will undoubtedly want the right to influence or control the governance of the company. Currently shareholders appoint farmers to the majority of the Board, who in turn appoint the independent directors. Will the underwriters require their own directors?”

“Further Mr Cochrane is suggesting the shares are issued at 40c each. This is a share price that is around 1/7th of the fair value opined by Grant Samuel, and 1/7th of the price being paid by Shanghai Maling.  Given the high probability that most of these new shares would end up being taken up by the underwriters, shareholders would be selling control of their company for 40cps. That is clearly not in the best interests of the company. And to who?”

“It is incorrect and totally misleading of Mr Cochrane to say there is bank approval for his scheme. We understand he is referencing a letter of interest from one bank to consider participating in a refinancing. That is not bank approval. Whereas, the Shanghai Maling partnership has the full support of our entire bank group and we have committed facilities for the coming season.“

Mr Hewett says a no vote will place the co-operative’s finances in a very uncertain situation.  “We have financing for the coming season based on a yes vote, but not for a no vote.”

“The Board will not play Russian roulette by entertaining a totally unknown option which would take the Co-operative into a period of significant financial uncertainty - especially when there is bank approval for the Shanghai Maling transaction. Whereas, that is exactly what Mr Cochrane is suggesting.”

“The Shanghai Maling partnership is not just about the money.  It will give us unique market access into the fastest growing red meat market in the world. That is of enormous value. What value do the mystery underwriters provide?”

“With our Shanghai Maling partnership we have worked together to build a strong package of controls to protect shareholders and farmer supplier interests in the co-op. We have pre-emptive rights around shares, a set of co-operative governance principles, and protections to maintain a 50:50 share in the operating company.

“With the Cochrane option we don’t have these protections– those underwriters would come  in at a very low entry price, likely gain control of the company and be able to sell their shares to whomever they like. There are no controls over what happens next.

“There is a lack of accountability from Mr Cochrane – shareholders have not elected him, he has no fiduciary duties to our Company and shareholders. He’s providing financial advice to shareholders when he’s in no position to do so. What if he’s wrong? What do you get as a shareholder – an apology? – this is a dangerous game.”

Dean Hamilton, Silver Fern Farms Chief Executive says the Shanghai Maling transaction has significant financial upside compared to the sketchy details in the underwrite.

The Shanghai Maling investment values Silver Fern Farms’ equity at $311m. This equates to $2.84 per ordinary share, which has been assessed by experts Grant Samuel as being fair value.

“Raising $100m through a share offer at 40cps would require the company to issue 250 million new shares – that is 2.5x the number of shares on offer today. The sheer weight of issuing 250 million shares would mean the Silver Fern Farms share price would be destined to trade at $40c. This is a significant downside for shareholders when compared to the Shanghai Maling partnership.”

“Pro-forma earnings per share under The Maling Partnership (28c per share) are almost twice that of Mr Cochrane’s (15c per share). The dividend return under the underwrite will also be lower for exisiting ordinary shareholders given the 8.25% preferential dividend that will be paid to the underwriters.

“The underwrite suggestion would see shareholders having to put in $1.00 per existing share, whereas the Shanghai Maling partnership will see shareholders actually receive $0.30 per share as a special dividend.”

“The Shanghai Maling Partnership will give us a unique opportunity in the China market, the resources to accelerate our global value added and through these initiatives create additional value for farmers.”

“Mr Cochrane, and his colleagues Messrs Richardson, Shaw and Gardyne are asking shareholders to vote down a game-changing opportunity with a known party that has the unanimous support of the Board, in return for a speculative underwrite, with an unknown group of investors, at a price that is materially below fair value and that does not have a committed banking solution. Their 5 minutes to midnight suggestion creates significant risk to the company and to its shareholders.”

“Shareholders should read the Notice of Meeting Information Pack and if needed seek independent financial advice.”

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42 Comments

Lets cut the "bullshit" the stronger position SFF is in the better it will be for farmers. If bringing in Chinese investment makes that happen then good. Lets face it, it wont be a Coop but forget the Coop they have had there day they are less than efficent and normally are run by CEO's who just want to grow turn over rather than profit because they are paid on the size of the organisation (Fonterra, Farmlands etc). If SFF don't deliver people won't support them and as long as they don't own the land it won't matter.

The Chinese investor see themselves acquiring and controlling, and say so.

Shanghai Maling Aquarius : Acquires Beef, Mutton Assets Abroad

HONG KONG, September 15, SinoCast -- Shanghai Maling Aquarius Co., Ltd. (SHSE: 600073) declared plans for wholly owned Hong Kong subsidiary to put additional investment in Silver Fern Farms Beef Limited, which will be 50% to 50% held with existing shareholder Silver Fern Farms Limited upon completion. The consideration will be NZD 311 million. The listed company will control foreign beef and mutton upstream resources through acquiring assets.

© Sinocast, source Sinocast Beats
http://www.4-traders.com/SHANGHAI-MALING-AQUARIUS-9950189/news/Shanghai-...

The casting vote rights given to Shanghai Maling for the appointment of the chief executive, approval of the business plan, and approval of the budget would seem to trump the promoted 50:50.
- and did someone say co-chairman...

I don't like the look of the Mayling partnership proposal. It is far from equal in that it yields total effective control to them. Why would they have insisted on this if they do not intend to exercise it. It reveals their mindset and intentions. They appear to want total control without any opposition so we can expect that they will manage the company in a way that is inequitable and transfers profits out of NZ into their retail operations. I.E the farmers will be screwed.
The pity of the SFF situation is that they just seem to need a bit more capital and time to come right. Comparing them to Alliance they are borrowing too much and paying through the nose for it. If Cochrane can swing the deal he is proposing it would put them in the right place to carry on sustainably. I think that the farmers should vote down the proposal and see if something emerges from either Cochrane or some alternative. Mayling may even be persuaded to come back with something more palatable.

Unless any alternative proposal is on the table shareholders can only consider the Mayling offer which does seem to offer a better opportunity for recovery than doing nothing as the Banksters want their cash back and do not appear to be prepared to wait - Farmer shareholders should consider this as well especially Westpac. In the end if Mayling operate in a way that disadvantages the farmer supplier they have the right to refuse supply, I suspect a month of no or low supply would force Mayling to the negotiating table albeit it is more in their interest to cooperate and prosper their farmers to ensure the preservation long term of their investment and I suspect this is what will happen.

the farmer supplier they have the right to refuse supply
In theory, but we don't agree. When stocks got to go... as kids it was drilled into us the importance of keeping the fat lamb buyer on side and the fateful meaning of "space at the works" conversations.

We suspect S Mayling could hold out longer than withholding suppliers.

What's your view with the Bank of New South Wales?

Supermarket chains aren't in the businesses of fattening their suppliers. When it's hard to raise prices, the way to increase margins and profitability is to throttle costs.

And once you own the producer, you have all the advantages of an own-brand strategy - selling at what the market will stand and buying at the price you set. Thereafter, with the supplier in your pocket, you work their costs downward step by step.

It's a big call for SFF to make.

If they don't pay fair prices sheep and beef farmers will look for alternatives incomes. Look how sheep numbers in particular have dropped in the last twenty years. You can only dictate prices to suppliers with no options. This is why fonterra is trying to manipulate the milk price back up by withholding product, because they don't want supply to drop anymore as farmers convert back to other farming options ,low cost beef production, cropping etc.

Its a bit rich to accuse John Cochrane of playing "Russian Roulette". What about the board who have effectively offered no alternate option by not negotiating banking terms past the end of the month! The financials at SFF haven't been healthier in a long period of time its hard to believe they couldn't get banking support for themselves from this position. Good on Cochrane for standing up for the co op and facilitating an alternative. Whoever they are they couldn't possibly be worse than this Shanghai Maling/ Bright Foods outfit with its corruption laden past. This has got the long tentacles of Goldman sachs written all over it, tying the board up in contractual knots to push the offer that generates the most fees. I must say there does seem a bit of a mood swing down here as farmers start to see through the spin. I have talked to several who were initially supportive but have been having second thoughts.

What are the loss making parts of the business? Perhaps we should be selling those off. I think the company should be split up , management must have been bad for years or it wouldn't be in this mess.

As much as I dont want to care because this is Silver Fern Farms, king of bad decision making, this has to top it off. I sincerely hope the shareholders that are allowed to vote (theres another story in there) think longer term. Take a sub 50% investment but by golly not this one. I also find it strange they are having trouble refinancing. While a lot of our competitors are turning to dairying it is leaving meat farming a profitable excercise for everybody.

Belle, my friends are taking a bath at auction this week, prices are way back. Weaners that sold for $1700 in the spring struggled to get to $900.

Where is that Aj? I see the US price in freefall. I reared a bunch of calves this year as I felt the store market would be too hot. Budgeting on about $270 all up. I attended the local sale to check out the situation. It was pretty hot alright. Well bred sorts about the 3.25 mark for r1s and r2s. Its going to be an interesting season. Dairy grazers back into beef, lots of calves reared, el nino on the horizon, and a falling meat market. God the stress! However we are starting from a pretty sweet spot. Local trade $6.10. And plenty on hand to kill now. Replacements cheap at $270. Might grab some lambs over summer and autumn. At least with a fattening policy there are a million different strategies to follow. I see a lot of folk stuck in the same old same old and they just accept their beating when it arrives.

Belle, thats South Oregon Nth California livestock auctions at Shasta county. I have a few bulls that are fat and could go any time, thinking...

Belle, Im out of feed, sounds crazy, the farm is green but very very short, if the wind blows we will be up against the wall again like last season. No hay and not even seed heads, last fall i fertilised, that was twice in 6 months and you cannot even tell. i have 24 acre paddocks with 10 bulls in them and no feed at all, looks like early September. Lots of frosts in the vineyard, the grapes are very late. I'm %40 back on what I normally carry ( all bulls)and i'm short.
In the UK the sheep are going, being replaced by beef, however TB is driving them nuts, farms that used to have 500 ewes now have 120 and the rest is now all beef, some friends are going organic beef, which appears to work but need a lot more shed space etc. Very little lamb in the supermarket and in Truro Tesco the thee legs they had were all local. I'm not liking the outlook for the lamb market at all.

Been tough spring here but its away now. Though I am expecting a very dry oct nov. That will make things bit tough. Killing everything I can as soon as possible. I have been taking note of your warnings about beef worldwide. The calves are my go to when things are tough. Rearing a bull and taking it through to slaughter has always been my savior. Looking at what was paid for weaner cattle in autumn a lot of folk might have cooked their big slaughter payouts they achieved and for those dairy graziers that were in to hedge their bets. Hmmm. Its going to be an interesting season Aj. I may well not make much for my effort of feeding these calves. But on the bright side it works off some of that winter umm excess.

Beef has been too high for too long, over production and competition from Pork and Chicken will take longer to work through the system this time, just like our diary problem. Too many people are using stock financing and this affects margins for the rest of us.
Markets signals are totally screwed up, could be a tough few years for anyone with debt.
I've panicked and killed cattle to early, so often that now I'm inclined to take my time, as long as the works are not busy the Chinese should take the slack up. Also I'm not talking of over a thousand bulls just a few trucks these days.

Well Aj I have just done a tiki tour of el rancho petito. I totally take back the thing I said about it taking off. The last two cold nights have put a holt to that talk. The last two oct novs have been wet wet wet. So I am betting the farm on dry dry dry. And while that schedule is six dollars I am not looking a gift horse in the mouth. I think this could be the year to avoid the saleyards. Go fishing. By the way I have heard ancalf milk powder has run dry. There were no sales. Fonterra pushed panic button to a low of about 46 a bag to suppliers In sept. That cracked it and it went out the door like crazy.

The other thing playing on my mind is the 5000ha of pine forest over the river that just disappeared this year. It now has ...as someone close to me says ....sh!tters on it. If this area didnt dry out enough before our forests were annihilated it sure will have its back to the wall now.

Belle, ever seen the movie 'stranger than fiction', where he gets stuck, living in someone else's story and has to find out if the book is a comedy or a tragedy.
Personally I've decided to go with the comedy option and laugh in the face of the 'shitters'.
People get subjective, they employ consultants who support what they want to do and their life turns into a tragedy, others follow the crowd which is fine, as long as you don't need to borrow. Farm debt levels tell us many have staked their futures on very risky business models.
Cheap money has created a wall of oversupply in Agriculture. Laugh in the face of those who said the world was going to run out of food. Companies are buying blocks of Merlot grapes in California and pulling the grapes out to plant almonds, meanwhile in Oregon they are pulling apples out to plant grapes, and in Hastings they are planting more apples.
We are all answerable to the market, if you are doing what everyone else is doing then you are just another sucker. My family started farming Bull Beef farming in the 60's, now it's so common and yet it's all based on a quota in the USA, to meet the demand for hamburgers, because the USA consumes more hamburgers than prime beef and they would rather sell prime than mince good beef, and want a market for excess fat. However now they are buying all the holstein calves and there are almost 11 million dairy cows in the States ,do they even need us anymore?
Go fishing.

China groups eye vast Australia land sale

"Chinese buyers are hatching bids for parcels of Australian land covering an area three-quarters the size of England complete with nearly 200,000 cattle, highlighting China’s growing demand for meat to feed its rising middle classes.China’s increasingly carnivorous diet has seen companies fork out almost $20bn on cross-border food deals in the past five years alone, according to Dealogic. But it has also brought conflict as countries such as the US fret about their own food security issues."

Got to be a dodgy story with the banks withdrawal of finance. Or is the real story the directors have manipulated it that way to manipulate this sale. Why would directors do that.
As for the reality the banks face. They will have to continue finance. Because to call in the loans means they will end up with ownership. The banks really really don't want to even start down that road.

I can recall another major New Zealand company that suddenly and strangely went to overseas ownership. (not in Agriculture) The speculation was that some spectacular bundles of cash went privately to management to make it happen.

It would have been good to be able to have two proposals up against each other, perhaps the best NZ proposal and the Shanghai Maling one. Unfortunately this latest proposal is too lacking in detail and too late. Cochrane and his mates have had six months plus to sort out a deal and have missed the boat. There is no way this proposal will influence my vote.

Sheepish,I think you are being a bit tough on John Cochrane. The Shanghai Maling deal was only announced on sept 15th, until then how was anyone to know that it would be such a bad deal. In any regard I think the SM deal is inferior to the status quo given SFF have strengthened their balance sheet so much so I can not see why the board should need a significant underwrite, they certainly don't require $261m. The price of accepting that sum is just too high.

Goldman Sachs did put out the feelers many months ago. Mind you SS given the SFF balance sheet they probably could have bought 50% of the company for half of 261 mill. Which begs the question why would they want to invest so much? As to the strengthening balance sheet, I guess they are back to where they were in 2010, which to me means they are another season away from a cock up like 2011 where every company fought hammer and tongs for supply on a declining international market price, and we would be back to 250 mil debt and the backs would roll SFF. The SM deal in the long term is not perfect but by then suppliers can vote with where they send their stock.

SM will look to weaken the opposition, especially Alliance so in the long term there will be very few alternatives, especially in the south. Not sure I agree re 2011 comments they have a vastly different strategy now and China has emerged as a significant alternative market in that time as well. That is the frustration for me, the macro outlook is excellent, SFF are well through tidying up their balance sheet and have an excellent strategy and then they recommend flogging it off at just the point it looks set to deliver. Don't for one minute believe the Chinese are investing in SFF to make NZ farmers wealthy.

Silver Fern Farms tells shareholders to "ignore mystery underwrite"

I wonder why? Dare I say it the Chinese may be offering nice remuneration packages for SFF management?

facilitation payments?

Some very good farms ( About 10 mostly sheep and beef) just come on the market in our area. Farms i've never seen sold before. Is this the start of a big sell off as worksafe kicks off along with new regional environment plans?

You farmers are getting too old, probably just an attempt to cash in on yesterdays prices. What's the average age of a Kiwi sheep farmer? I think it's over 58 now. Going to be a lot of farms sold in the next decade. Most will just be a lot of work for very average returns, going to hard to finance on that
$100 a hectare average profit.

I think that the regulators don't realise what a difficult job it is to run some of these farms, we may be lucky in the future to find anyone to do it. The big growth industry in the world involves jobs that stop productive work. What are the powers that be trying to do? create artificial inflation by adding massive costs to productive industries?

I can run your farm, but i need $150 a hectare to make it worth my while ;-)

Ceding control to the Chinese Government
The SFF Co-op will retain $17million, with $7million of this specifically earmarked for future Co-op's directors' costs.

http://www.odt.co.nz/opinion/opinion/358625/ceding-control-chinese-gover...

Wow!! That reads a bit differently to the spin that's being sold.

"Despite this positive trend, some of SFF's banks have now 'lost patience', and will no longer guarantee finance beyond the end of October this year. Why they have done so at this particular moment is a mystery. Withdrawal of finance would lead to a receivership."

This bit is interesting. Are the banks conspiring with the Chinese government connected firm to give the SFF board no option, but to accept the deal? Strong armed so to speak.One could conjure all manner of reason for why they would do this.

Silver Fern Farms:-
An essential strategic examination of two deals by Rod Oram at Radio National

Shanghai Maling retains the right to appoint CEO with control over the budget and veto powers over decisions, explains vertical integration and where the value is captured. Shanghai Maling controls 600 supermarkets while Bright Foods controls 800 hypermarkets, and finally the power to destroy Alliance

Rod Oram
http://www.radionz.co.nz/audio/player/201771603

Previously on Interest.co.nz September 2015
http://www.interest.co.nz/rural-news/77607/shanghai-maling-invest-261-mi...

In breaking news, there is an email attributed to John Rodwell doing the circuit down here revealing who the" mystery underwriters "are. Rodwell has tabled a previous $40m underwrite and claims it is now substantially bigger. His syndicate includes Lowe Corp, Richardson group (a highly respected southern transport company) and drumroll please.... Landcorp. It does not include Alliance group. Things really heating up down here!

Landcorp have done well out of SFF premiums, Lowe Corp won't like the Chinese pushing into the pelt business, transport would probably be integrated, all part of our ' brave new world'.

keep us posted ... there must be at least 200,000 patriots who do not want to cede their sovereignty to outsiders, who would be willing to put some money where their mouths are ... say $300 each ... that would raise $60 million, no sweat, with a few prepared to cough up more .. well ... now is the time for all true patriots to show some true patriotism

For so long we have listened to the songsters singing the song "tenants in our own country" - well now is the chance to do something about it

Great sentiments Iconoclast. My feel is now the details are in farmers hands they can see how shonkey this deal is. From the referenced email:

The underwrite effort was coordinated by John Rodwell at the request of SFF. Through a process of face to face meetings and presentations made by Directors and management of SFF and John Rodwell, a group of New Zealand agri -business companies agreed to commit the $40m considered sufficient by the company to underwrite an issue of preferred shares to its shareholders.

As pointed out by the company recently, this $40m infusion was not sufficient to gain bank support.

"The underwrite group continues to be in place should that be of assistance to the company post its impending meeting on 16th October. It has grown in numbers and financial capability, with offers of participation having increased substantially and the capacity to increase further if requested. This has been conveyed to the company.

The group is made up of New Zealand companies with exposure to and interest in the agribusiness sector. Important members of the group include Landcorp, H.W Richardson Group from Invercargill, and Lowe Corp. Alliance is not part of the group. The objective of the underwriters is not to own shares in SFF per se, but to assist the company facilitating a rights issue if there was an appetite for its shareholders to subscribe.

If requested by the company this offer of support could be formalized into firm contractual commitments. Terms and conditions that have been discussed with the company already, and a large body of legal work has been advanced at the company’s expense".

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