Mega-Merger Viable – Current Structure Flawed
Mega-Merger Viable – But The Current Structure Is Flawed
Eoin Garden, Chairman of PPCS Limited, believes industry consolidation along the lines of the proposed Alliance Group’s mega-merger concept still represents the ultimate solution for the long term sustainability and profitability of the New Zealand meat industry.
“We understand some other potential participants have not signed the Alliance- imposed agreement. This implies the proposed mega-merger had effectively become a merger of PPCS and Alliance, which would then look for opportunities to acquire certain assets from other meat industry players. In our view this is not an industry solution but a piecemeal acquisition model which is not what has been put before the stakeholders to date.”
Mr Garden, in advising of the decision of the PPCS board not to sign the current form of the co-operation agreement as proposed by Alliance, said Alliance had failed to address two fundamental issues; firstly, the need to follow a conventional process including proof of concept and business case prior to valuation work and secondly, that all other participants sell all processing assets into the entity.
As a way forward PPCS has proposed a “co-operation agreement” intended to advance a “proof of concept” – that outlines the industry structure and shape of any merged group and provides feasibility, and clarity around the position of other participants, leaving open the prospect of a more detailed agreement in due course. This could include offshore marketing agreements.
Mr Garden said that to advance these alternatives, as a matter of necessity, a suitably qualified independent person would be appointed to govern the process.
“The original Alliance Concept as detailed in its letter to shareholders of 12 February 2008 stated the concept was based on aggregation so that ‘80% of NZ livestock is managed from farm to market’. This model was estimated (although still not substantiated) to improve farm gate returns by $400m.
“Given the failure of other participants to commit to sell their businesses into the model, that model is no longer on the table. Accordingly, the estimated cost savings and rationalisation benefits of merging five businesses were no longer available to the proposed merged entity.”
Mr Garden said PPCS could not be held responsible for the model not proceeding when its foundation had effectively changed and the other parties were not participating to the level envisaged under the original AGL Concept.
“A very real danger in pursuing a hybrid of the original concept is that it pays a premium for assets others are willing to sell, incurs rationalisation costs, takes on substantial debt on behalf of farmers, but still leaves some or all of the re capitalised participants competing against the new entity either directly or in other species.”
Mr Garden added that while active leadership as shown by Alliance and other promoters was admirable, it needed to be supported by comprehensive analysis and an executable implementation plan. “The current proposed Mega Meat merger had neither.
“PPCS has and will continue to promote or support initiatives within the industry to remove cost duplication and capture additional market opportunities. In that respect we have recently explored cost reduction and aggregation initiatives, both of which were not taken up by the companies that had been involved in the Mega merger negotiation,” said Mr Garden.
“Our Rightsize Project, which is about repositioning our business and other initiatives, are projected to deliver significant benefits to PPCS shareholders and contribute to industry rationalisation. Accordingly, the PPCS board and management are totally committed to pursuing these initiatives irrespective of any other proposals to rationalise the industry at this time,” said Mr Garden.
He suggested that in contrast to the uncertainty that surrounded the Mega Merger in terms of time frames and outcome, the PPCS initiatives:
- Would be achieved within the next six months
- Were not dependent upon outside agencies such as the Commerce Commission, Government or European Union
- Would deliver significant benefits to the company and suppliers alike
- Would not compromise in any way an industry consolidation which we believe will ultimately take place.
“We would still maintain that a merger or a strategic marketing alliance between the main parties in the industry is appropriate and supportable in the longer term, and we would support those aims. Accordingly PPCS is more than willing to engage, in good faith, with Alliance or other parties in any constructive initiatives to improve the industry structure.”