Silver Fern Farms at a turning point

Now SFF has shareholder approval to restructure as a company quoted on the secondary board with tradable shares, it’s timely to ask who is likely to be in the market as an investor other than existing farmer suppliers. Initially this situation will only arise when existing shareholders elect to sell their shares, because these will be the only shares available.


However the board has reserved for itself the right to increase the 5% cap on shareholdings held in the non-related category which could eventually amount to 20% of the total shares on offer without triggering any other legislative requirement, such as a full takeover offer under the Takeovers Code. Therefore it’s worth considering whether this sort of situation could ever happen and, if so, what the motivation might be.


SFF’s farmer suppliers were clearly concerned about ownership and control of their co-op under the new model, since this was the main topic of conversation at the supplier meetings, but, according to Keith Cooper and Eion Garden, the company hasn’t been a true co-op for some time. Only a third of livestock supply comes from rebate shareholders and the rest is supplied on the spot market, while funding the new plate to pasture strategy means co-operative ownership would be unable to provide the required financial strength.


This begs questions about which of three scenarios might occur – either existing shareholders fail to come up with enough cash to fund the new strategy, or the company’s performance doesn’t meet expectations, or the market collapses, exacerbating the impact of the first two scenarios. These are all possibilities with the last one perhaps the most likely, resulting in uncertain demand in the present global environment, especially when lamb in Europe and beef in the USA appear to have peaked and our dollar remains obstinately strong compared with our main trading partners’ currencies.


None of these scenarios implies a criticism of the new capital and governance structure approved by shareholders, but any or all of them would have a negative impact on the company’s ability to trade profitably and meet the expectations of its shareholders.


The answer to the first question will be known within a month, with proceeds from the conversion to ordinary shares in the bank. Uncertain factors are the amount of capital subscribed and how many ‘dry’ shareholders (those who won’t qualify for the rights issue, unless they supply before the offer closes) will qualify. There won’t be any early share trading developments, since farmers who elect to take up their rights are most unlikely to sell them immediately on the unlisted exchange, especially if Grant Samuel’s valuation report predicting a larger than usual discount to face value is correct.


But over time shareholders will choose to sell some or all of their shares and a market value will be established. Inevitably the balance of the shareholding will change over time, with an increasing proportion of outside investors acquiring a stake in SFF. How aggressively the ratios will change depends on farmer commitment to their company, influenced by the Performance Premium Pools reward structure, the dividend stream, share price and, ultimately, by the profitability of farming.


Even if not envisaged at this stage, it is feasible at some point in the future the board will need to bring in a new commercial investor up to the maximum allowable 20% shareholding. The lower the uptake of shares from the initial offer, the more likely this will be. The question here is whether the constitution will permit this, but I assume it will be possible to allocate a 20% bloc of ordinary shares up to the issued capital of the company at a price the board can set. The major issue is whether any investor would be interested, unless both the share performance and dividend policy make it irresistible, because the shareholding wouldn’t carry full voting rights.


This hypothetical situation will arise whenever the board considers it needs to raise more capital than it can obtain from the existing shareholders. This would be entirely appropriate, if the new market led strategy proved so successful it required more equity than farmers could provide to take it to the next level and the placement could command a premium. Conversely it would be a tragedy if it was dictated by a return to the days of poor returns and a worsening balance sheet.


It’s a turning point for SFF and its suppliers in more ways than one.


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One Response to “Silver Fern Farms at a turning point”

  1. Sam Says:

    The fact that Keith Cooper and co have presided over such massive losses while at the same time remunerated themselves at ever increasing rates is unbelievable.

    Comparing the salary structure and profitability of Affco with SFF is incredibly illuminating and shows exactly what needs to be done at SFF. Unfortunately, SFF senior management are more interested in ensconcing themselves at the expense of shareholders. Keith Cooper should be paid $200k in cash and the remainder should be paid entirely in stock options, same goes for the rest of the pigs at the trough at SFF.

    SFF received $42m in compensation from PGW, they also went cap in hand to the shareholders to the tune of around $50m if I recall correctly. Keith Cooper has reduced that $92m together with the largest meat processor in NZ, into a company worth $45m according to the market. It is a complete disgrace and Cooper needs to go.

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