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Wait for third-party offer: Farming Systems

Monday 23rd August 2010

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NZ Farming Systems Uruguay told its shareholders not to sell into Olam International or Union Agriculture Group’s takeover offer because it has a potential third suitor which doesn’t want control of the dairy farm developer.

At the company’s annual result presentation, chairman John Parker said the model of setting up a New Zealand style, grassland-based dairy farming structure in Uruguay was correct, but that the structure and performance of NZFSU hasn’t been good enough.

Farming Systems, which reported a US$10.4 million loss for the year ended June, is the subject of a 55c-a-share offer from Singapore-based agribusiness firm Olam and one pitched at 60 cents a share from Uruguay’s Union Agriculture. Shares of Farming Systems last traded unchanged at 63 cents on the NZX.

NZFSU has been looking for additional funding to increase irrigation levels from about 3200 hectares to over 10,000 hectares, as well as boost soil fertiliser levels on land that in many cases has never been top-dressed.

“Adapting New Zealand farming methods to Uruguay has proved more difficult, and taken longer than anticipated,” Parker said.

“With hindsight, initial estimates of the speed of productivity growth and profitability were ambitious, even allowing for drought and a lack of capital. The offerors clearly see value in what has been established to date and the future earnings prospects.”

Parker said both the Olam and UAG offer are significantly below the independent adviser’s valuation range of 65 cents-to-79 cents a share, and 40% below the net tangible asset value of 92 cents as set out in the 2010 accounts.

He said there has also been no value placed on the imminent internal placement of a company chief executive officer to oversee management of its operations, currently carried out under contract by PGG Wrightson, nor NZFSU’s recently announced status as a project of national interest in Uruguay. The tax benefits of the latter are estimated at US$20 million to $25 million, worth an estimated 11-14 cents a share to NZFSU.

Parker said the board has been in discussions with various parties who might be able to contribute equity for over a year, being well aware that more capital is required to boost production levels to those that might be expected in New Zealand.

The growth in milk demand, and extra costs for grain fed confinement type dairy systems means NZFSU is well placed to capitalise on the work already carried out in Uruguay he said.

Parker also disagreed with some of Olam’s original statements that eastern Uruguay was not suitable for dairying. NZFSU’s most productive farm was in that region he said.

The NZFSU board members will not be selling any of their shares to Olam or UAG, and expects to report on the third party offer before the expiry of current proposals on September 24.

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