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Opinion: Making hay while sun shines on field of rural change

By Andrew Macdonald of NZPA

Friday 17th December 2004

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With a fistful of dollars and a bent for blitzkreig acquisitions, sharemarket high flier Craig Norgate has cast a long shadow over the corporate rural world.

Industry analysts say the former Fonterra boss has likely sparked a wave of consolidation in the rural services sector, one that's long been expected.

First there was the hostile takeover of Wrightson with his Rural Portfolio Investments (RPI) securing a 50.01% stake.

Then, last week, Norgate, via Wrightson, stumped up with a few dollars more to grab a 19.9% stake in Williams & Kettle (W&K) at $4.67 a share. W&K shares were down 1c at $4.63 in late afternoon trade on Friday.

W&K is now subject to a full-takeover offer by Wrightson at $4.70 a share, but this has yet to get Commerce Commission approval.

In its current guise the Wrightson-W&K duo is a formidable force in the rural services industry, the combined chain of outlets spanning the country.

Hamilton Hindin Greene broker Grant Williamson says Wrightson clearly has its eye on extracting strategic benefits from W&K.

"There must be a lot of earnings potential through stripping out costs... so that's probably why Wrightson was prepared to pay such top dollar," Williamson says.

"Wrightson did their homework before the bidding war started on W&K they'll be looking to get full control if they possibly can for the cashflows it offers," he said.

On Friday last week, in a flurry of counter bids sparked by a Fonterra offer of $4.20 a share, Wrightson branded 19.9% of W&K as its own.

In doing so it staved off competition from a Fonterra-Pyne Gould Guinness (PGG) joint venture, which was after a blocking stake.

"It's very interesting to see that PGG and Fonterra have got together and I'm sure they'll will be looking elsewhere for other acquisitions," Williamson says.

The question becomes, what form further consolidation in the rural services industry - renowned for its vipers' nest of competition - will take?

There is a trinity of key players, among them Hawera-based Allied Farmers and Christchurch-based PGG, both listed on the sharemarket.

Allied shares were unmoved at $2.50 near the end of Friday's session, while those in PGG were stable at $2.00.

Then there's rural sector behemoth Fonterra - with its RD1 rural supplies unit - making rumblings in the wings.

Norgate's arrival in the market with investment vehicle RPI clearly upset any plans Fonterra had to find synergies with Wrightson, the latter's shares up 3c at $1.86.

"They tried to hop into bed with Wrightsons and that didn't happen and they're now trying it with Pyne Gould Guinness," Williamson says.

"They (Fonterra) are obviously very keen.... They're obviously looking for a partner to help."

This in mind, Macquarie Equities NZ investment advisor Arthur Lim says the signs of co-operative consolidation are abundant.

The Fonterra-PGG joint venture - Town and Country Agri-Investments - oozed with co-operation.

Similarly, he says, Wrightson's play for W&K is clearly far more friendly than hostile, which suggests those firms have been in talks.

And, Lim says, that is with good reason.

There are likely to be benefits by merging Wrightson and W&K in terms of cost efficiencies, but that can only be taken so far.

"This is a people industry at the end of the day. You cannot cut costs, particularly staffing costs, too far without starting to impact on your customer and business base," Lim says.

This is something former Wrightson chief executive Greg Kay found out the hard way when he tried to revamp the company in the 1990s.

These are businesses that are made or broken at the so-called coal face, where farmers and stock and station agents build long-term business relationships.

"Where the real rationalisation can happen is where a lot of small stores are in one place, and you can rationalise it into one store, but still keep the people," said Lim.

"There's something like 25 crossovers between Wrightson and W&K, by merging the two you can immediately strip out a lot of costs from the system."

This probably what Norgate sees in W&K, its strong North Island network complimenting the nationwide Wrightson operation.

The fact remains, the rural services sector is brimming with competition, the big players each clamouring for market share; competition will increase and new niches markets will be sought, including Internet-based services.

It's something that PGG chairman Bill Baylis touched on at PGG's annual meeting in October.

Bayliss warned that the farm servicing sector was over serviced and predicted some industry consolidation and restructuring.

In this light, Williamson says, both Fonterra and PGG are sure to be looking at other options after their move to build a blocking stake in Wrightson failed.

"PGG are probably now going to struggle a wee bit to make a lot of headway in the North Island with Wrightson having such a stranglehold there," Williamson says.

"You can be sure, because they are a conservatively managed company, they'll be taking their time," he says.

There's a possibly a PGG tie-up - or, at the least, co-operation - with Fonterra's RD1, while a likely target for acquisition is Allied Farmers or even Taranaki-based Farmlands.

Any advances on those fronts remain to be seen, but with change in the wind it's likely every player, big and small, will have one eye on the horizon and another over their shoulder.

"Players like Farmlands and Allied Farmer are going to have to join in the rationalisation or be marginalised out of the industry," Lim says.

In other words, the rural services sector is in turbulent times.

This point is not lost on Allied Farmers chairman Brian Train who - amid speculation that the small firm will be the target of a Fonterra-PGG bid - has watched the company's shares spike 50c since December 9 to their current all time high.

"We watch over the parapets and see what the rest of the world does," Train says.

Of the turbulence, Lim says much of it has come from a changing of the guard at shareholder and management levels of rural services firms.

"Along with that's come a change in mind set... I think that has allowed discussions to take place," Lim says, referring to Norgate.

However, Williamson says, it's important to keep the consolidation in the rural sector in context.

"It's happening in buoyant (economic) times... the rural companies are looking to consolidate and diversify in such a way that their earnings base will be less volatile further down the track."

In other words, Norgate et al are making hay while the sun shines.

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