Bright Food provides Silver Fern with letter of comfort over Shanghai Maling vote

Friday 16th October 2015

China's state-owned Bright Food Group has provided a letter of comfort to Silver Fern Farms that it will vote its 38 percent stake in Shanghai Maling Aquarius in favour of acquiring 50 percent of New Zealand's biggest meat company.

Some 82.2 percent of votes were cast in favour of the transaction at a SFF shareholder meeting in Dunedin today, comfortably exceeding the 50 percent threshold the board had set. An alternative funding proposal that would keep the cooperative in New Zealand hands failed, with 76 percent of votes cast against that resolution.

The letter committing to vote for the deal makes the Shanghai Maling special meeting of shareholders on Oct. 30 more of a formality than a significant hurdle and SFF is also confident the transaction will be approved by the Overseas Investment Office in a process it expects will take six-to-nine months, said chief executive Dean Hamilton, who will stay on through the ownership change. Shanghai Maling also needs Chinese regulatory approval for an investment outside of China.

The Bright Food letter "is as close to a done deal as you're going to get in Shanghai," Hamilton told BusinessDesk. The OIO consideration would be the longest part of the approval process. Shanghai Maling is expected to lodge its application either today or Monday, he said.

Hamilton said the lengthy turnaround time expected of the OIO, which exceeds its benchmark for applications, was more to do with the limited resources of the regulator and the size of the deal than any difficulties over the investment per se. He said the government's decision to decline Shanghai Pengxin's application to buy Lochinver Station didn't suggest Shanghai Maling's proposal would fail because the transactions were dissimilar.

"The sensitive subject in New Zealand is around land. Yes, they (Shanghai Maling) are acquiring land that sits under our 19 plants but that's very much ancilliary to the deal," he said. "This investor is strategic, with assets in China that would allow us to leverage our business. All those things will add value to Silver Fern."

Shanghai Maling's $261 million of cash was actually flowing into the business, strengthening its balance sheet, repaying its banking syndicate and allowing it to invest in its factories and its Plate to Pasture strategy. There would be "an element of rationalisation" with or without the investment, given the trend of dairy conversion had left the industry with too many sheep meat plants in the South Island but the capital would also give SFF the ability to grow, he said.

He expected the deal would be in place between March and June next year. New Zealand meat exporters aren't yet allowed to ship chilled meat to China, meaning SFF can't yet sell its branded, table-ready cuts of meat there as it can in Europe and the UK but Hamilton was hopeful that would change in the next 12 to 24 months.

New Zealand First leader Winston Peters criticised the deal, saying the government had failed to come to the aid of SFF and was likely to "roll over" by granting OIO approval.

“The big winners today are the Chinese government, HSBC, Rabobank and the Commonwealth Bank of Australia," Peters said in a statement. "Meanwhile, Goldman Sachs pockets a cool $8-$10 million for putting this deal together. When farmers reflect they’ll realise what a sour deal this is," he said, adding that there was likely to be "an unprecedented procurement war that’ll break the other big red meat processors" once the deal was completed.

HSBC, Rabobank and CBA are members of the banking syndicate headed by Westpac Banking Corp which had threatened to withdraw support if the Shanghai Maling deal wasn't completed.

Shanghai Maling is one of four Shanghai Stock Exchange-listed subsidiaries of Bright Food, which has expanded rapidly since being founded in 2006 to become China's second-largest food manufacturer. It owns 51 percent of milk processor Synlait through another subsidiary Bright Dairy & Food, and other acquisitions in the past five years include 60 percent of UK cereal maker Weetabix, 75 percent of Australia's Manassen Foods and a majority stake in Italian olive oil maker Salov Group.

Shanghai Maling shares were last down 1.1 percent to 12.54 yuan on the Shanghai Stock Exchange, having climbed about 21 percent in the past three months, a period when the CSI 300 Index fell 12 percent. SFF shares jumped 23 percent to $1.60 on the Unlisted platform today. The shares traded at just 35 cents in July, before the deal was disclosed, a fraction of the $2.84-per-share value of Shanghai Maling's proposal.

BusinessDesk.co.nz

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