Profit warning makes Silver Fern Farms’ deal more critical

Last week’s profit warning from SFF chairman Rob Hewitt confirmed what industry observers suspected – this season has been affected by a combination of factors which has made achievement of the budgeted profit more remote than ever. At the half year Hewett had already warned the year end result would be materially different from budget without specifying numbers. The latest warning indicates break even at best.

 

The current season has suffered from reduced livestock volumes, regular rain and grass growth in most parts of the country which even out supply patterns, and an obstinately strong NZ dollar. Processors have been squeezed at both ends, paying too much for livestock and not earning enough from the market.

 

Against this background, the SFF shareholder meeting set for 11 August appears ever more futile and damaging to the company’s interests. Last week’s press release reiterates the board’s frustration and disappointment with the actions of a small group of shareholders who have requisitioned a special meeting in an attempt to overturn the deal with Chinese company Shanghai Maling.

 

“Subject to Overseas Investment Office approval, Silver Fern Farms is bound to complete the transaction with Shanghai Maling. This meeting – whether the resolution is passed or not – cannot change that.

 

“The Status quo is not an option. Our disappointing financial performance this year illustrates again the volatility of the industry and the risks associated with our current capital structure. We remain under lender pressure to address these issues.

 

“The Board believes Messrs Shrimpton and Gallagher do not appreciate, and so are not fairly or accurately representing, the prospects and risks of any refinancing and restructuring the Co-operative would need to undertake should the Shanghai Maling investment not proceed.”

 

When I spoke to John Shrimpton several months ago, he was adamant SFF had failed to disclose relevant financial information to shareholders before holding meetings as a result of which it gained 82.5% of votes cast in favour of the transaction. He claimed the vote did not comply with the constitution which required a 75% vote at a special meeting.

 

The substance of the requisition was that SFF’s financial position at the end of the September 2016 financial year was significantly better than stated and consequently did not carry the risk of a banking foreclosure as claimed by the company. Unfortunately the 2017 budget painted a rosy future which, if achieved, would have further minimised the probability of banking facilities being withdrawn.

 

Of course what the banks knew, as did everybody else with experience of the meat industry’s volatile profitability, was that every season is different and two good years very rarely happen in succession. However, for reasons which appear to be driven more by bloody mindedness than logic, Shrimpton and his group remain determined to inflict as much damage on SFF as they can.

 

Following the announcement of Shanghai Maling’s intended investment of $261 million, SFF’s shares have risen in value from 35 cents to a level nearer their issue price of $1, but that doesn’t seem to be of any interest to the requisitioners. They appear to   more interested in destroying the company than in securing its future, because if they are successful the board would have to resign, the banks would withdraw support and the staff would be in limbo. Would anybody fancy the idea of Shrimpton and Gallagher as chairman and deputy with their obviously intimate knowledge of running a meat company?

 

The most sensible outcome will be resounding shareholder support for the transaction and a positive OIO decision. The latter will secure SFF’s future as a well-capitalised meat processor and exporter.

 

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Tags: John Shrimpton, NZ dollar, OIO, Shanghai Maling, Silver Fern Farms