Bank deadline gave SFF too little time for other offers

Bank deadline gave SFF too little time for other offers

Oct. 2 (BusinessDesk) - Silver Fern Farms ran out of time to consider alternatives to a 50-50 joint venture with Shanghai Maling Aquarius, because of the looming deadline for its debt facility with a banking syndicate and the risk that lenders would withdraw support and tip the meat company into receivership if the deal isn't consummated, Grant Samuel says.

The independent appraisal of Shanghai Maling's $261 million investment proposal concludes that the terms and conditions are fair and the per-share value of $2.84 falls within Grant Samuel's valuation range of $2.56 to $3.03.

Yet the report also indicates the banks ran out of patience with SFF, having set a target for the meat company to reduce debt by more than $100 million through the introduction of new capital. Debt jumped in 2012 with the cost of rebuilding SFF's Te Aroha plant, the debt-funded build-up of working capital after weaker lamb demand led to a "significant" build up of inventory, a poor financial result from the sheep business because of lower demand and high farm gate costs, and a strong kiwi dollar.

While net debt reached $386 million by Sept. 30, 2013, SFF and its lenders were more rattled by the seasonal peak debt, which blew out to $550 million in early 2014, making them "increasingly alert to the financial risk the company was exposed to."

As a result SFF embarked on a strategic review that ultimately led to the Shanghai Maling offer, but Grant Samuel notes that the company was making progress in strengthening its balance sheet. Net debt fell to $287 million in 2014 and was forecast drop further to $148 million in the 2015 year and to just $88.7 million by September 2016, although the seasonal peak would still reach $333 million that year.

Earnings before interest and tax are forecast to rise to $71 million in 2016 from a forecast $39.9 million in 2015. Gearing would shrink to 18 percent in 2016 from 55 percent in 2013.

"As a result of an improved financial performance and other strategic initiatives, SFF has achieved a degree of deleveraging over the last two years and it is arguable that given time it will be able to achieve a more conservative capital structure without the need for new capital," Grant Samuel says.

The risk of adverse circumstances such as receivership or liquidation if lenders withdrew their support meant the Shanghai Maling proposal was reasonable on these grounds alone, Grant Samuel said. The Chinese deal would achieve recapitalisation, remove uncertainty, create new opportunities for growth and "is strongly supported by the board of SFF and the banking syndicate," it said.

An alternative funding proposal from a group of New Zealand agribusiness companies to underwrite a rights issue for between $40 million and $50 million was rejected by SFF's bankers and Grant Samuel notes that "the time frame to arrange alternative debt finance, in light of the pending expiration of the current facility on 31 October, became too tight."

The advisory firm says the capital investment from Shangai Maling "is excess to the current requirements of the company."

The deal proposed by Shanghai Maling and unanimously supported by the SFF board also allows the cooperative and its members to be looked after as their interest in the meat company shrinks to 50 percent. The total deal actually values the business at $311 million plus $7 million to meet the cooperative's directors' fees and governance costs into the future, $50 million available for distribution and $7 million estimated transaction costs.

The banking syndicate, which is led by Westpac Banking Corp, last month agreed to provide SFF with transitional banking facilities that will tide the company over until the Shanghai Maling deal settles. If shareholders don't approve the deal at their Oct. 16 special meeting, "the future of SFF Co-op will be uncertain," Grant Samuel says.

The transitional debt could also be voided by the resignation of key SFF executives, failure to reach milestones in the capital raising process agreed with the lenders, the transaction being turned down by the Overseas Investment Office, or Shanghai Maling backing out.

The notice of meeting for this month's special meeting also includes a resolution from shareholders Allan Richardson and John Cochrane for a detailed examination of a merger with Alliance Group before other options are considered. They oppose the Chinese deal and say farmers will lose control of the value chain and become price takers.

The SFF board recommends shareholders vote against that resolution, saying talks with Alliance over an extended period had failed to result in a merger proposal, the rival's chairman was on record saying there were sound commercial reasons why a merger wasn't realistic and that Alliance had been invited to participate in the formal new capital process.

(BusinessDesk)

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