Big falling out between would be partners

Several clichés spring to mind after the latest twist in the relationship between Silver Fern Farms (SFF) and PGG Wrightson (PGW), but at the moment “Hell hath no fury like a (partner) scorned” seems the most appropriate. When I spoke to Keith Cooper about the $10 million offer from PGW and its method of presentation – a letter closely followed by the press release last Tuesday afternoon – he used words like ‘antagonistic’ and ‘unusual’, particularly since the parties were in discussion, and said the offer was ‘grossly inadequate and totally unacceptable’.

 

While at first glance $10 million may seem generous, as it covers SFF’s estimated costs of $3.5 million plus an ex gratia compensation payment, there are a number of unusual aspects to both the offer and the way it’s been presented. For instance PGW is very much on the back foot, having pedalled backwards ever since it failed to complete the deal last September, so why it thinks these shock tactics will work with its jilted partner is surprising.

 

PGW will provide for the amount offered in its half year accounts due out next week which hints at the reason for the desire to achieve an urgent settlement, but the mediation proposal before a retired High Court Judge suggests PGW doesn’t necessarily expect its offer to be the end of the matter. This indicates a wish to minimise legal costs for both parties, although Keith Cooper has already said it is likely to end up in litigation.

 

The Business Case for the partnership between the companies estimated short-term benefits of $59 million and long-term gains of $111 million which is why SFF considers the compensation offer, effectively $6.5 million after costs, inadequate. These benefits were classified as arising from cost synergies from savings in livestock procurement and corporate overheads, increased stock volumes and processing efficiencies, in-market benefits and on-farm productivity gains.

 

Craig Norgate, PGW’s Chairman, is still trying to convince SFF they can work together to achieve the identified benefits in procurement and other aspects of an integrated meat industry supply chain without consummating the formal partnership, but in this case SFF shareholders would keep 100% of the gains. However this is grasping at straws, hoping against the odds it will convince SFF to accept an offer it considers unacceptable, whereas SFF has clearly lost faith in PGW.

 

In fact PGW’s credibility is seriously under threat from several quarters: its bankers are nervous about its debt levels, the share price has fallen from a 12 month peak of $2.99 to below $1, its subsidiary NZ Farming Systems Uruguay is likely to require a substantial writedown and its shares have fallen from $2 to an all time low of 57 cents, Pyne Gould Corporation wants to sell its shareholding, and one analyst has mentioned a figure as high as $144 million as possible damages for the failed deal. No wonder it wants to get out with a $10 million provision.

 

Norgate imagined he could simultaneously reinvent the stock and station industry, set up a New Zealand dairy farming model in Uruguay which has suffered from internal problems and the global dairy price collapse, and ride to rescue the meat industry from the error of its ways almost single handed. I think it’s been a bridge too far, because any one of these requires careful focus to achieve the desired results.

 

It’s obvious SFF has moved on from the partnership model which would have created one livestock procurement team under PGW’s ownership and control, designed to manage on-farm production to meet market specifications and processing schedules, resulting in a higher proportion of chilled product. The jury was out on how well PGW would have been able to get its agents to work to a completely new model and maintained or increased SFF’s throughput volumes.

 

But now it’s forward to the past for SFF which must focus on galvanising its livestock team to produce better results with the financial resources at its disposal. The partnership deal is over and any hope PGW has for its resuscitation will drown in the acrimony of the compensation dispute.

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One Response to “Big falling out between would be partners”

  1. Bill Cash Says:

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

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