Monday, September 8, 2008

Silver Fern Farms & PGG Wrightson Meat Industry Merger Approved

Farmer shareholders of the producer cooperative, Silver Fern Farms, have approved a merger with PGG Wrightson, a stock and station agent, to vertically integrate part of the New Zealand meat industry.

The hybrid business organization will meld the farmer cooperative, SFF, with a 60 years-long history of sheep & beef meat processing & distribution into export markets with the stock exchange listed corporate PGG Wrightson, itself a merged entity over the years of several major stock & station agent firms that engage in livestock procurement for freezing works as well as selling farm inputs, transacting rural real estate, and lend working capital to farmers.

A SFF-PGGW entity will vertically integrate the supply chain "from plate to pasture" with livestock purchase contracts being secured between farmers and PGG Wrightson agents to supply SFF meat works. The use of "from plate to pasture" is mean to symbolize a more demand-driven perspective of the new company, though in practice it will still be a supplier so a more accurate, not to mention logical, slogan would be "from pasture to plate".

Vertical Integration of new meat company, SFF & PGG Wrightson Summary of Business Case, Pricewaterhouse Coopers, 2008. click pic for larger image

Silver Fern Farms barely secured the required 75 percent super majority of farmer shareholders required to approve the merger, with a 75.62 percentage vote in favour.

The new entity will have a 50:50 share capital split between SFF and PGG Wrightson. PGG Wrightson's NZ$220 million payment will provide a capital injection that boosts shareholders funds to $510 million and the equity ratio to 80 percent. Offseting this is the potential loss of farmer control. While farmers will have a 50 percent representation on the new board, farmers are unlikely to vote as a bloc, based on historical experience, and the separation of ownership from control phenomenon may be expected to bias board control towards the PGG Wrightson bloc over time where its directors on the new board may be expected to speak with one voice in favour of PGGW interests.

The New Zealand meat industry has been trading in a tough global environment in recent years. Sheep numbers have fallen from a peak of 70 million in the early 1980s to just over 40 million. High interest & exchange rates, increasing production costs, and excess processing capacity, have reduced the profitability of meat exports.

SFF and another meat processor, Alliance, had contemplated a horizontal merger of meat processing facilities to reduce excess capacity but those talks broke down. The executives of the new SFF-PGGW entity have indicated that they would consider further consolidation of the industry with Alliance to improve the profitability of the meat export sector.

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