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Olam loan extension to Farming Systems is fair to minority holders, Grant Samuel says

Wednesday 9th November 2011

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NZ Farming Systems Uruguay, the largest single producer of milk in Uruguay, will collapse if shareholders voting in New Zealand don’t approve an extension of funding by their company's Singaporean majority shareholder, according to an independent report by Grant Samuel.

Farming Systems is asking shareholders at its annual meeting in Auckland on Nov. 24 to approve the extension of a loan from 86 percent shareholder Olam International by a year to Dec. 31. 2012 and increase the credit limit to US$110 million from US$85 million. The ordinary resolution must be passed by a majority of shareholders not associated with Olam.

"Shareholders who vote against the resolution are putting the company at significant risk of liquidation, potentially resulting in a substantial erosion of value if the company were not to continue with the existing Olam loan," Grant Samuel said in an independent report.

The extension of the term of the Olam loan and the increase in the amount of the facility is fair to the minority shareholders not associated with Olam, the report says.

NZS has advised that the interest rate of 8.9 percent, including 10 percent withholding tax, on the loan is in line with what it would have to pay a third party and that it could not borrow US$110 million from external sources currently. The loan from Olam is also unsecured.

An earlier US$120 million rights issue did not go ahead. Grant Samuel says a smaller rights issue in conjunction with some form of redeemable capital or loans from all shareholders would be more appropriate.

Cash flows from operations are forecast to increase to approximately US$20 million in 2013 and stabilise at around US$26 million thereafter.

Based on this level of cashflow, equity of $80 million to $90 million and shareholder loans of $30 million to $40 million would be reasonable going forward, Grant Samuel said.

NZS was established in 2006 to apply New Zealand’s expertise in dairy farming to low cost farmland in Uruguay and the proceeds of an IPO were used to acquire three farms from New Zealand rural services company PGG Wrightson.

The land and development cost was more than expected and production was lower. PGG Wrightson has been removed as manager and Singaporean company Olam is now the majority shareholder and provider of funding.

The funding is on arms length terms and is essential to enable the completion of the development capital expenditure to bring all of the farms into full production, Grant Samuel says.

NZS is the largest single producer of milk in Uruguay, accounting for approximately 6 percent of national production.

The company wants to account for 17 percent of the total milk produced in Uruguay by the 2013/14 season.

Uruguayan milk production accounts for 0.3 percent of total world output and Uruguay exports more than 60 percent of its milk, which is unusually high.

Vivek Verma, managing director of Olam Dairy Products and the chairman of NZS, has confirmed that if shareholders do not approve the extension of the loan, then Olam will not take any action to enforce payment of the existing loan in the short to medium term.

Approximately 96 percent of Uruguay’s dairy is processed by 10 large firms, the largest of which is Cooperative Nacional de Productores de Leche SA, a farmer owned cooperative that processes 61 percent of Uruguay’s total milk supply.

NZS expects to increase milk production rapidly from 105 million litres in the year to June 30, 2011 to almost 300 million litres in year to June 30, 2014.

NZS has approximately $US42 million of carry forward tax losses in Uruguay. The company has been granted Project of National Importance status, providing it with a further tax benefit of $US42 million.

BusinessDesk.co.nz



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