Cheeky approach by Silver Fern Farms

The open letter from SFF to Alliance’s and its own shareholders is an unconventional, back door way of attempting to get the result you want, when your approach by the front entrance has been rebuffed. In fact the open letter admits the direct method hasn’t worked, so the board has decided to try what can only be described as a cute route to the desired objective.

Owen Poole on behalf of the Alliance board of directors has reacted sharply with a letter to shareholders arguing against the approach by SFF, restating its reasons for not supporting previous merger proposals and undertaking to put the topic on the agenda for its AGM in December. In light of the 90% vote by Alliance shareholders against the merger last time they voted on it, it’s very hard to see how taking out space in major newspapers is going to achieve either a different result or a suitably representative spread of responses. Admittedly one can never be sure, but given the short timeframe to respond and what I believe is a pretty negative reception from the target voters, I can’t see it succeeding.

So the question is why SFF is doing it in the first place. You would think the board must either be confident of a different outcome this time or just plain desperate. Is it because the annual result is due out shortly containing some less than ideal news for shareholders or is it because, hand on heart, the board believes merger of the two co-operatives is the only solution to the company’s and the industry’s problems?

The questionnaire in the open letter asks for a Yes/No response to the appointment of an independent facilitator who will chair a committee to answer several leading questions, one of which suggests the need for a strategic plan for the industry. And I thought this was underway at the moment, funded by Beef + Lamb and MIA, of which Keith Cooper, CEO of SFF, is both a board and council member!

The letter also wants respondents to agree with conducting an independent analysis of the financial benefits of an amalgamation of the two co-operatives. But Alliance found a recent analysis by SFF to be singularly unconvincing, as it “grossly overstated the benefits” in its reply to the open letter.

Alliance has been entirely consistent in its objections to a merger, insisting the burden of SFF’s balance sheet would adversely affect Alliance’s shareholders. SFF has achieved a substantial improvement to its balance sheet in the last few years, but this has been achieved by reduction in stocks and debtors (partly caused by loss of market share as well as better management), closure and sale of redundant assets, sale and leaseback of working assets, and one off payments such as settlement of the PGW court case. It’s also worth remembering last year’s balance sheet was based on 13 months trading and the fixed assets arguably contain capacity which must still be rationalised.

This has substantially reduced interest charges and improved operating costs, but the easy and not-so-easy wins must be all just about gone. Unfortunately none of this has enabled the company to achieve true profitability which has lagged well behind the other meat companies’ published results.

Alliance has also argued consistently a merger of 80% of industry capacity is necessary for a successful restructuring, but 50% would arguably place the merged company in a vulnerable position in relation to the other companies. Experience shows combining nominal market share by merger or acquisition inevitably results in loss to competitors who pinch share, while the merged entity is busy finding its feet after the disruption of the merger. Furthermore Alliance says the merger proposal places responsibility on the merged company for rationalising the industry’s structural over-capacity which is largely held by SFF.

SFF’s cheeky approach doesn’t look any more likely than previous attempts to convince Alliance, but at least we should soon know the answer.

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