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Silver Fern Farms says new Chinese JV a game changer

Silver Fern Farms says 50/50 joint venture with Shanghai Maling an industry game changer

By Fiona Rotherham

Sept. 15 (BusinessDesk) - Silver Fern Farms chairman Rob Hewett says the proposed 50/50 joint venture with Shanghai Maling Aquarius, a listed subsidiary of China’ state-owned Bright Foods, will be a game changer for the cooperative and for New Zealand's red meat sector.

The board has unanimously recommended accepting Shanghai Maling as a partner in a new company, Silver Fern Farms Ltd, which will be 50 percent-owned by the current cooperative and the other half by the Chinese firm. The transaction values Silver Fern Farms’ equity at $311 million and equates to $2.84 per share, compared to 35 cents per share prior to the July suspension of trading in its shares on the Unlisted platform.

Shanghai Maling will invest $261 million cash to own half of the new business. A special dividend of $35 million, or 30 cents per share, will be paid to the cooperative’s ordinary and rebate shareholders. The board will also redeem the 5.5 million of supplier investment shares it has outstanding.

Hewett said the company, which at $2.3 billion revenue is the country’s biggest meat processor and exporter, has struggled with debt in recent years. Under this deal it will have the strongest balance sheet of any red meat company in New Zealand with zero debt, be in a positive cash position by the end of next year, and have the money it needs to invest in updating its plants nationwide and increasing its value-add Plate to Pasture strategy, particularly in China, he said.

“We have a partner who supports our strategy, wants us to accelerate, has the resources and the relationships to help us specifically in China, and will provide us with significant capital to put us in a position of not only financial sustainability, but one of strength.”

Hewett said the deal had been one of the worst kept secrets in the red meat sector and represents the single biggest investment in Silver Fern Farms history and New Zealand’s wider meat industry.

“It’s about more than money. It’s about getting married and if you’re getting married for money only it will usually end in tears. This is about aligned values and unleashing our value-add strategy,” he said.

The intention is to pay 50 percent of net profits as a dividend to both shareholders in future, pending board approval.

The cooperative will continue to procure livestock as it does now and the existing governance structure of the co-op will remain. It will have five representatives on the new board, while the Chinese company will have another five, and it will be co-chaired by Hewett and the head of Shanghai Maling.

Dean Hamilton will remain chief executive of the new company and he says there’s no danger of SFF putting all its eggs into one basket and just focusing on China, which is its second largest market at 15 percent of sales, behind the US.

The company will continue to sell through other channels in China while taking advantage of Shanghai Maling and Bright Foods’s distribution channels, where it made sense to do so, and SFF plans to focus particularly on markets in Germany, the US and China.

The company said shareholder approval wasn’t required for the deal, but the board thought it necessary to get 50 percent of shareholders across the line rather than risk a large number of suppliers taking their livestock elsewhere.

Hewett and Hamilton are going on a nationwide roadshow in the next few weeks to sell shareholders on the deal’s merits before a vote at a special general meeting on Oct. 16 .

He's confident shareholders will back the deal, but said Silver Fern Farms had no alternative plan if they don’t: “This is plan A and plan B”.

The deal requires approval by the Overseas Investment Commission and Chinese state regulatory authorities and may take six to nine months to complete.

Hewett said even though its banking facility falls due at the end of October, the company's banking syndicate supports the deal and is prepared to wait until the new entity is in place next year.

All processing will continue to be done in New Zealand because Chinese consumers value the country’s reputation for food quality and safety, said Hamilton, who got a standing ovation this morning when informing SFF's 7,000 staff about the deal.

Shareholder groups in Silver Fern Farms and its neighbouring Alliance Group have called for both companies to consider merging in favour of taking on foreign investment.

Hewett said this proposal will position the company better to continue conversations with other meat processors about partnership deals to solve over-capacity and other issues.

Wanaka-based businessman John Rodwell confirmed local agribusiness companies had clubbed together with an offer to underwrite a rights issue to existing shareholders as an alternative to foreign investment, but the company's bankers were understood to have deemed the $40 million-to-$50 million offer as insufficient. The group had since boosted its underwrite ability "substantially" but had been unable to communicate with SFF because it had signed agreements not to talk to other parties.

Hewett said none of the other offers were as good as the Shanghai Maling deal, which was the only one that won banker support, and left the company in a good financial position.

“Our balance sheet has been under pressure for several years and if you look all the others in the industry their balance sheets are in a similar state. We’ve had a good year but it’s a bit like being the tallest in a bunch of pygmies. It’s not where we want to be,” he said.

The Dunedin-based company last month told shareholders it was on track for 2015 full-year earnings before interest, tax, depreciation and amortisation in the range of $75 million to $85 million. Debt would be in a range of $140 million to $170 million compared to $289 million last year, it said.

The company’s value-add strategy has been gaining momentum and it has a target of 10 percent of overall revenue from value-added goods by 2017, compared to 4 percent in 2014.


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