Alliance says merger with Silver Fern risks "beached whale"
By Jonathan Underhill
Sept. 28 (BusinessDesk) - Alliance Group chairman Murray Taggart says any merger with Silver Fern Farms risks creating a "big beached whale" of the New Zealand meat industry because its rival needs the capital offered by China's Bright Food just to rationalise plant capacity and reduce its debt burden.
Bright Foods' Shanghai Maling Aquarius unit has offered to invest $261 million cash in Silver Fern Farms (SFF) to become a 50-50 partner with the Dunedin-based meat company in a deal that would leave the business debt free and with funds to upgrade plants, spend more marketing higher-value meat products and provide a new route into China.
The injection of funds has stoked speculation a stronger SFF could subsequently dictate terms for a tie-up with Alliance, something the two firms have failed to achieve in a decade of sporadic talks. Alliance says it made an offer to SFF prior to the rival embarking on its capital-raising process and had "worked hard to engage with SFF and discuss opportunities for industry consolidation" over the past 10 years.
SFF has called the Chinese deal an industry game changer and sector consultant Keith Woodford says it would leave Alliance more vulnerable, with its own surplus capacity in sheep meat. But Taggart says Alliance has already made progress upgrading and rationalising capacity, such as mothballing its Sockburn site in Christchurch and closing its sheep meat operation at Mataura while upgrading its beef lines to serve a catchment marked by dairy conversions. By contrast, SFF has more work to do in trimming capacity, he said.
"Unfortunately, the fact is when a company has been under a bit of financial pressure they don’t upgrade plants," Taggart told BusinessDesk. "A lot has to be spent on SFF plants. It is a commonly held view in the industry they are carrying more plants than they should."
The pro-merger lobby of farmer shareholders at both meat companies backed a merger "to try to achieve a step change in competitive position, but we’d still be a pip-squeak in the global market, and in New Zealand could be the big beached whale of the industry," he said.
SFF has some 22 meat processing plants to Alliance's eight sites, but by Alliance's estimate is killing only a third more stock, "meaning they are carrying a heap more overhead per kill than we are," Taggart said. Repaying debt was only one issue for its rival, he said.
SFF lifted sales by 16 percent to $2.28 billion last year but finance costs of $37.4 million contributed to a small net loss of $301,000, compared to a loss of $37.4 million a year earlier. Alliance's 2014 sales rose 5.3 percent to $1.46 billion, while it paid interest of $10.5 million and reported a net profit of $6.2 million.
SFF has made its deal with Shanghai Maling subject to approval of 50 percent of shareholders who will vote on it at a special meeting on Oct.16. It also requires clearance from the Overseas Investment Office, whose recommendation that Shanghai Pengxin's $88 million purchase of the 13,843 hectare Lochinver Station be approved was rejected by the government on the grounds that it didn't provide enough economic benefit to New Zealand
Federated Farmers president William Rolleston said the two deals aren't directly comparable because Shanghai Maling is buying into just one player in the processing industry, rather than building up farming capacity.
"If they aggregated a significant amount of land to supply into SFF then that message is there. But we’re not at that stage," he said.
Fed Farmers wanted to be seen not to be directing SFF's shareholders on how to vote, while urging them to consider the implications of the deal carefully.
"We've had 10 to 15 years of nothing actually happening and I don’t think that situation was going to last," Rolleston said. "Now we’ve got someone to come into the mix who provides immediate value and market penetration. The question is where will control lie and what’s the future of the meat industry."
"There would be an upward push, hopefully, in meat prices but you’ve got to be able to push deeply into the market to capture value further down the value chain," he said. "We need overall value to lift, not just for one company."
Taggart says he doesn't expect Shanghai Maling would subsequently try to drive a merger between SFF and Alliance, saying its behaviour as a shareholder of Synlait Milk has been hands off. But a bigger impediment is likely to be clearance from the Commerce Commission.
"The legal advice we've had, and anecdotally have heard SFF has been told too, is that it would be almost impossible to get a merger of Alliance and SFF through the regulator," he said. "Alliance has 85-to-90 percent of the Southland processing market. It is well above the safehaven threshold the regulator has. It would be very, very challenging to achieve regulatory approval for that type of dominance in the industry."
Shanghai Maling president Weiping Shen said he expected Chinese demand for New Zealand red meat to grow, if the deal is completed, given his company's wide distribution reach.
Still, Taggart says the "huge opportunity" in China, where Alliance has sold meat for 16 years through its relationship with Grand Farm, has to be put in perspective.
"People need to realise that currently only lower-value cuts go to China," he said. "We don’t have chilled access to China - that's a government to government issue and we all know how long that takes."