By Jenny Ruth
Tuesday 1st June 2004
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Former Fonterra chief executive Craig Norgate and Baird McConnon, founder of the Mainland brand, are trying to gain control of rural services company Wrightson through Rural Portfolio Investments. RPI already owns 13% of Wrightson, acquired through a stand in the market at $1.45 a share in September last year, and at the beginning of this month it increased its offer from $1.50 a share to $1.65 a share to take that stake to 50.01%. Those accepting the offer can either take cash or redeemable preference shares in RPI or a mix of both. By late Wednesday, RPI had lifted its stake to 23.6% and Wrightson shares were trading at $1.54. The offer is due to close on June 23. Wrightson is advising shareholders to reject RPI’s offer. Fonterra owns 19.2% of Wrightson and has said it won’t accept RPI’s offer.
ShareChat: Why did you buy into Wrightson in the first place?
Craig Norgate: I didn’t have a lot of experience with Wrightson at Fonterra. It was a passive shareholding. We never got anything other than the annual dividend cheque. It was a very small investment, not something we took much notice of. When I left Fonterra, I was given a whole lot of approaches, some of which were too small if you took out the dairy ones. I didn’t want to go there because I was conflicted. I found myself wondering, what if I had a vehicle that could roll all these things together. At the time I left Fonterra, the decision had been made to sell the (Wrightson) shares, we just hadn’t got around to doing it. So from my point of view, I didn’t see a conflict with Fonterra.
SC: Why do you think Fonterra has decided not to sell now?
CN: I’m not so sure that they have. All they’ve said is that they won’t accept. That’s not unusual for a large shareholder at this stage in the process. An eight cents dividend on $1.65 is hardly a good return.
SC: But Fonterra only paid $1 for its shares.
CN: When you measure these things, you’ve got to measure it against the opportunity cost and, in addition, what they expect the share price to do over time.
SC: So you see Wrightson as what?
CN: It’s the only agricultural services business that has reach across the country and across the broader base of New Zealand agriculture. Most of the other players are regional or focused on just one sector. Whilst that diversity has often been a problem to Wrightson in terms of complexity and losing focus on particular areas, I’m used to running a business that’s much bigger than Wrightson. I see that as an opportunity.
SC: What about these approaches that were too small?
CN: There’s an awful lot of innovation in New Zealand agriculture, people with great ideas that they’ve developed but just can’t get to market. If you look at the history of farm productivity, it’s been driven by off-farm innovations.
SC: Wrightson’s directors say you have no plans to add value to Wrightson. Is that true?
CN: I don’t think you will find a situation where someone like me would outline what they’re going to do with the business. It’s a mischievous comment by the directors who clearly have their own reasons for not supporting the bid. I haven’t seen them at any stage in this process focus on getting a deal that they could support.
SC: Why do you think Wrightson’s board is so hostile?
CN: I don’t spend too much time wondering about those things. Clearly, there’s an awful lot of people which thing we can bring something to this company and that this company needs something.
SC: What are the things current management is doing wrong?
CN: We’re not insiders. The reality is we measure performance by results. Results are important by any measure. I wouldn’t countenance any smoke screen. We had a situation where this company nearly went belly up several years ago. The current board and management did a great job of bringing it back from the brink. The reality is for the last couple of years the trend is more than one off. Profit fell from $21.2 million to $18.5 million last year. That was to a certain extent outside their control. They’re forecasting a profit of $12.5 million for the current year. You can’t accept any excuses. What they’re forecasting for next year is a pullback to $15 million to $16.5 million. This is simply not good enough. This is a stock that has been underpinned by a high dividend payout and when you have a fall off in profit, that’s under threat because the dividends have to be cut. The reason we haven’t outlined detailed plans – people can pass their own judgment as to whether people with experience like Baird and I have can do something for a company like this. It’s not in shareholders’ interests for us to be outlining those plans in detail.
SC: Do you have replacement managers ready if you win control?
CN: No. We’re not so sure that the issue is the management of the business. What we’ve said is we will roll up our sleeves and get alongside people and realise what it is that’s making the company under perform. The feedback we get is that it’s at the customer interface that the company’s struggling. It may well be that systems and structures rather than the people themselves (that are the problem). If you can simplify procedures and structures, you can often get a turn around quite quickly.
SC: What is your view of the potential of Wrightson’s finance business?
CN: We would acknowledge that there’s potential value there. We think it was fully reflected in the Grant Samuel valuation. There’s potential to rebuild that book. They had to sell the finance business when the company was in trouble a few years ago and then they were restrained from anything but short-term finance. That restraint came off last November. Different people will have different views as to what the potential is. Grant Samuel has passed judgment on it. We’re not denying there is potential there.
SC: Should Wrightson be investing in Genesis? Other have criticised it taking a 15.4% stake because it doesn’t give them enough say.
CN: I think that’s accurate. It’s hard to understand why they went in in the way they did when they did. It’s hard to see how they can justify having the chairman and chief executive on the board of a business that’s so small. That’s a heck of a commitment in terms of time compared to what you might get by putting that time into the rest of the Wrightson business. But you have to be committed to technology. Wrightson is a natural user of what comes out of biotechnology, particularly at the seeds end of the business. Perhaps they went about it in the wrong way.
SC: Do you see potential for Wrightson to work with Fonterra and its RD1 subsidiary?
CN: They’ve been talking about it for three years from my understanding. There are opportunities and, frankly, a need for rationalisation, but I don’t see that adds a lot of value for the company. Most of the benefits of that are going to go to customers, not to shareholders.
SC: Could you work with Fonterra if you gain control, given the complexities of your own and McConnon’s relationships with people at Fonterra? (Mainland was sold to Fonterra in 2002.)
CN: Absolutely. Most would say they would enhance that because when you’re putting together a joint venture, understanding the motivation of the parties and being able to be flexible when you structure deals is a key part of the negotiations. To date, they haven’t been able to bridge those gaps. You do have different motivations.
SC: Could past relationships get in the way of any co-operation?
CN: It depends on whether people have a common vision as to what they’re trying to achieve. We’ve got a long association, having been involved in the company for quite some time. In my mind, those relationships help both understand what it needs to be able to work together and the chances of being able to do so.
SC: You’re still a long way from getting 50% acceptances. Doesn’t that suggest the RPI bid will fail?
CN: You can look at the comparison with Tenon. You can see we’re well ahead of where they were at the same time. The reality is people who buy shares on the market will not accept until the last couple of days and major shareholders will not accept until the last couple of days. There are nearly 3,000 shareholders who have already accepted. We’re absolutely confident this offer will be successful. Particularly in the last week, we’ve said we would confidently expect to be there within the next fortnight. We didn’t increase our bid lightly. Frankly, this company was well-valued at $1.50. The only reason we did that is we wanted to get this over quickly.
SC: What else could you say that you haven’t already to persuade retail shareholders to accept the bid?
CN: They’ve got an 8.5 cent dividend relative to a share price of $1.65. The traditional yield they’ve enjoyed with Wrightson has now dramatically changed. They would be better putting the money in the bank. They’re far better putting it into our redeemable preference shares. The Wrightson board itself has acknowledged the shares will fall if the bid’s not successful. This is a simple equation now. That’s why we’ve seen close to 3,000 shareholders already accept.
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