‘Your company, Your future’ is the headline on Silver Fern Farms’ Information Pack to shareholders, explaining the capital restructuring programme which the company is now busy promoting at a series of farmer meetings throughout the country, culminating in a Special General Meeting on 30 July. Approval of the Constitution requires 75% of those voting at that meeting or by proxy to vote in favour of the Resolution to exchange the present co-operative shares for ordinary listed shares, buy shares in a 2 for 1 rights issue, receive a 1:4 bonus issue and reduce the size of the Board of Directors.
It’s an ambitious campaign to achieve major changes to the capital and governance structures of New Zealand’s largest meat company. It could be said SFF had Hobson’s choice after the collapse of PGG Wrightson’s acquisition of half the company last year which would have strengthened the balance sheet by $220 million. But it is also a much more constructive and innovative way of solving both farmer commitment and equity issues than pulling in outside funds and handing over control of livestock procurement and half the business, having already obtained a $42 million bonus from PGW.
The big question is not whether SFF will receive shareholder approval for the constitutional changes – I think they will, because farmers have been looking for this sort of strategic shift – but how much money they will succeed in attracting. The maximum obtainable under the rights issue is $128 million, but the figure of $80 million has been mentioned as the anticipated limit. I’m not sure what that figure is based on, but it’s still a hefty sum to attract from the sheep and beef sector in these tough times, although the option of payment over three years through deduction from livestock returns makes it attractive.
Subsidiary questions are how compelling the offer is and how many suppliers will be prepared to invest, either up front or over three years, in proportion to their livestock supplied. The alternative of continuing to hold $1 redeemable rebate shares remains an option, but they wouldn’t receive dividends or value gain. Grant Samuel’s independent report values the shares at $1.40, although mention is made of the increased transparency of ordinary shares compared with the traditional co-operative share.
For more transparency, read more risk, because clearly the new shares can lose value as easily as they can gain it. There are many AFFCO shareholders who bought ordinary shares in the 1990s and lost money on their original purchase at 50 cents per share, but, unlike SFF’s shareholders, they received nothing in exchange for their co-operative shares which had no value after the capital restructure. AFFCO’s shares have since been split to 25 cent shares and are currently worth 43 cents on the market, underpinned by Talley’s majority ownership.
However the capital raising experience, including attracting two cornerstone shareholders in Dairy Meats, ironically since taken over by AFFCO, and Peter Spencer, was very tough. At the time there just wasn’t enough profit in farming to encourage all AFFCO’s shareholders to buy in, although the capital raising programme was just as extensive as the one being carried out by SFF. However SFF’s shareholders generally have more loyalty to their company and will probably demonstrate that in August.
At least SFF is in a much stronger position than AFFCO and the industry in the 90s and still has all its banking arrangements in place till September 2010. As a result it can offer a 1 for 1 conversion before farmers have to make any financial commitment.
The other big issue for shareholders is a philosophical one – SFF says farmers’ voting power will not be allowed to fall below 60%, but this implies the other 40% could belong to non-farmers. SFF’s board retains the right to lift the on individual shareholdings in the non-farmer shares to 20% which may be essential to attract outside capital. This is a big variation from traditional co-operative ownership, although it does preserve the fundamental principle of farmer majority shareholding and voting power.
It’s time for a change like this to underpin the future prosperity of farmers and the industry.
Tags: capital raising, shareholder options, shareholders' options, Silver Fern Farms
Barber's Meaty Issues 
July 30, 2009 at 11:52 am |
Have just read your post. The final meeting will be held at Balclutha later today, where many shareholders will hear the slick presentation for the first time. But the postal and online vote is closed.
Even though a hand delivered vote can be made at this meeting something does not compute.
The consultation done by SFF Chairman & Board has not been meaningful as the time frame was too short.
As well there should NOT have been one vote as there were three seperate issues to be considered.
Capital structure, governance and constitutional issues.