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Opponent lays out alternative for Silver Fern Farms sale

Silver Fern could stay NZ-owned for as little as $25k per farmer, says Chinese deal opponent

By Jonathan Underhill

Oct. 9 (BusinessDesk) - Silver Fern Farms could be kept in cooperative ownership for as little as $25,000 per farmer and the meat company's board would be irresponsible not to consider a "plan B" if it fails to garner support for its proposal to sell half the business to Shanghai Maling Aquarius, says an opponent of the deal.

SFF shareholder John Cochrane this week circulated an alternative proposal to issue 250 million new shares that would have preferential status and be entitled to a preferential dividend for five years. The shares could be offered at 40 cents each on the basis of 2.5 new shares for each existing share held, and offer a return of 8.25 percent, Cochrane said in a flier titled 'The Facts Why Farmers will be better off if they vote NO'.

For an average farmer with 25,000 existing shares, that would mean buying 62,500 new shares for an upfront cost of $25,000, and receive an annual preferential dividend of $2,062.50. The rights issue would raise $90 million and could be underwritten by local agri-businesses, he said.

The alternative proposal is part of an ongoing war of words between the SFF board and shareholders who oppose the sale and have succeeded in forcing a second resolution, to consider a merger with Alliance Group, on to the agenda of a special meeting called for Oct. 16 to vote on the 50-50 venture with Bright Group's Shanghai Maling. The board has set a relatively low threshold of support at 50 percent of those voting.

SFF's board responded to the Cochrane proposal by reiterating its unanimous support for the Shanghai Maling deal and warning shareholders to ignore "the mystery underwrite" that is "a total unknown and should be treated with extreme caution."

The board has been on an extensive roadshow to farmers to promote the Chinese deal and chairman Rob Hewett says after meeting more than 2,000 suppliers and shareholders in the past 10 days, the feedback is "strongly in favour of the partnership." He also said Cochrane hasn't put his proposal directly to the board.

Cochrane argues that shareholders are being presented with no viable option other than to approve the sale of half their company to Shanghai Maling because the notice of meeting and independent adviser's report are peppered with references to the threat that lenders would withdraw their support if the deal fails, potentially forcing the company into receivership and liquidation.

Grant Samuel deems the terms and conditions of Shanghai Maling's $261 million offer fair, with the per-share value of $2.84 falling within its valuation range of $2.56 to $3.03. But Cochrane picks up on some counter-factuals in the Grant Samuel appraisal: that the scope of Shanghai Maling's investment "is in excess of the current requirements of the company" and that SFF had made progress on its own in bringing down its debt burden, which is projected to shrink to just $89 million by September 2016 from $287 million in 2014.

"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 said in its report.

An earlier version of the alternative funding plan was rejected by SFF's bankers and Grant Samuel noted 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."

Cochrane said the threat of banks foreclosing was "hollow" but it was still irresponsible for the board to play that card without having an alternative plan. "The board has backed itself into a real corner here," he said.

He also questioned some of the 'sweetheart' aspects of the deal, including $7 million that would go toward directors' fees for a cooperative whose governance needs may well shrink with the reduced stake in the meat company.

"I'm not sure what the role of this new board is going to be. If it is just a shareholders' council, then that seems to be excessive," he said.

And he said farmers will lose control of the company, because Shanghai Maling's 50 percent stake comes with a casting vote for its co-chair on governance issues, including the appointment of the chief executive, and approval of the business plan and budget.

"That is control - I can't see it as anything other than control," Cochrane said.

The issue has also been raised by veteran fund manager Brian Gaynor, who noted in his New Zealand Herald column last week that Shanghai Maling insisted on the casting vote so that it could consolidate its investment for accounting purposes under the financial reporting standards applicable in China.

"This casting-vote agreement is a concern and could lead to serious problems in the years ahead," Gaynor wrote. "Joint venture arrangements are challenging, particularly when they involve two different cultures with one representing producers and the other owning distribution facilities in another country. In effect, Shanghai Maling has been given the opportunity to acquire a controlling interest in New Zealand's largest meat export company for just $261 million."

Cochrane wouldn't identify the agribusinesses that may be willing to underwrite a placement and said it was up to SFF's board to do the leg work on a plan B to the Shanghai Maling sale.

But he handed out compliments to SFF's leadership as well, saying of chairman Hewett and chief executive Dean Hamilton: "I think they've done a fantastic job in what they have managed to do" in restoring the company. "They need to stand up and back themselves."


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