Almost a year ago Brian Gaynor pointed out that three rural companies, PGG Wrightson, Pyne Gould Corporation, and New Zealand Farming Systems Uruguay with their interlocking boards, had squandered shareholder wealth to the tune of $880 million. Now, having cleared up numerous conflicts and governance problems, appointing John Parker as chair and with new faces in the Management Company, Farming Systems Uruguay is under offer.
First Singapore-based Olam secured a commitment from Manager PGG Wrightson, to buy all its shares at 55c each. Why did PGW break all advisers guidelines again, and immediately jump at the offer. Could it be PGW knew there were others
in the background?
Then a competing bid was received from Uruguay’s Union Agriculture Group at 60c each. The independent board members including Craig Norgate and Murray Flett, issued a strong rebuff, supported by a Grant Samuels’ opinion. This priced the shares between 65 and 79c each, and allocated an NTA of over $0.90/share.
The plot thickened with John Parker’s announcement that a mystery buyer was interested in buying out the PGW loan, and providing $60 million funding for the final stages of development. Nothing has been heard since.
NZFSU guidance was a loss of $10 million based on a conservative production forecast and a milk price of 25c/litre. This has been vindicated by the recent annual result. Production for the year was up 52% while expenses rose only 12%. The company hopes for a profit in 2012. Were the two buyers attracted by the large tax incentive, just confirmed by the Uruguayan tax office, or were they simply taking advantage of the cheap farm prices they see in this balance sheet?
Finally the Olam offer was increased to 70c/share – the middle of the Grant Samuel’s range, and the independent directors have recommended partial acceptance of the offer. This is an unusual recommendation which they have emphasised by stating that Olam would better as a corner-stone shareholder at 51%, rather than an outright owner.
On the face of it, the offer may seem attractive. Some valuations based on discounted cash flow of average past earnings are very low. The company bought too much overvalued land in the 2008 year at an average US$4600/ha. Latest sales at $3600/ha indicate a gap between market value and cost, although the company says it has already taken the required write-downs. The managing company, PGW (which in the face of severe criticism reduced its commission rates,) has now negotiated termination of its management. This is a positive because although Keith Smith claimed in the original prospectus for NZFSU that “PGG Wrightson had an unmatched combination of knowledge, experience and demonstrated capability… to create a profitable farming business in Uruguay,” PGW never really proved that, in buying land, meeting forecasts, or establishing production.
It is hard to work out just how important NZ Farming Systems Uruguay is to PGW because it earns contributions from seeds, and financial services outside its management fee plus dividends from the Uruguayan company. There is also the potentially unstable political situation in Uruguay. Could a successful corporate farming venture be nationalised in future? Some Sharechat readers have commented that there is no room for corporate overheads in a dairy farming business. They forget that the two margin model of share milking is common throughout the industry.
Perhaps shareholders should take a longer term view. The current milk price is steadily above the 25c of the forecast. Demand is increasing substantially in developing markets. NZFSU is at an early stage of its life. Its existing farms are capable of producing a profit of $35 -40 million by the 2014-15 year. Its governance problems have largely been corrected, a new CEO is to be appointed and other management internalised.
As long as the operators are allowed to achieve results without directors squandering their efforts, as happened in PGG Wrightson, this company could perform for shareholders, Uruguay, and the New Zealand economy. Too often do we see NZ directors and shareholders selling out too early, at a low price, leaving us all with the impossible invisibles balance that year after year undermines our balance of payments.
Contributed by Alan Best. NZSA Director