Uruguay investors believe all is not lost

09-08-2010 | Hugh Stringleman

Smaller shareholders in New Zealand Farming Systems Uruguay (NZS) have already dismissed Olam's 55c a share offer as woefully low (Farmers Weekly, July 26).

Why sell out at around half of the share capital contributed and the net tangible asset (NTA) backing when NZS is only two or three years away from positive cash flows and good dividends?

To answer that question shareholders have to examine earnings prospects and further capital requirements for about US$60 million, the company says, which may include a rights issue and/or more borrowing.

NZS promoter and manager PGG Wrightson (PGW) claims Olam brings a certainty of further capital needed to complete development of 49 farm dairies, stocking to 54,000 milking cows and irrigating half of each dairy platform.

But its conditional sale of 11.5% NZS shareholding to Olam is also criticised as disloyal by many of 1500 smaller shareholders.

They say PGW made mistakes in the execution of land purchasing, the need for irrigation, electricity supply, cow genetics, pregnancy rates and pasture varieties yet now proposes to walk away with its accrued "performance fee" while admitting it doesn't need to sell the NZS stake for financial reasons.

Retail investors can stay in NZS if they want although they risk being trapped with a majority shareholder (Olam) which can call the tune in ways to which AFFCO farmer-shareholders and NZ Rural Property Trust unit holders could hum along.

Throw in the collapse of Rural Portfolio International and the share price carnage of PGW's own failed attempt to merge with Silver Fern Farms and beleaguered PGW/NZS shareholders have several reasons to be angry.

If NZ Inc can do no better on its first corporate effort to plant our agricultural technology and expertise in foreign soil then perhaps we had better stay small and play at home.

Shareholder Paul Cooney said the Uruguayan farming development concept appealed to him right from the start.

"It is fundamentally a good proposition, using Kiwi expertise on cheaper land.

"I don't place the blame on management but on the directors who went for a land grab, beyond the plans in the prospectus, and used the capital raised and needed for development.

"The concept is still sound and has a good future which is why Olam has taken an interest," Cooney said.

PGW's proposed exit is a stab in the back for small investors.

"If it had NZ farming interests at heart why would it choose to exit?"

Cooney thinks NZS should work with Olam and its international contacts while maintaining NZ listing and taking a long term view to pay-off which, he said, many farmer-shareholders would understand.

NZS said late last year that it expected to complete development in 2012 and reach full milk production in 2013, given sufficient capital.

Using the company's own valuation, 36,000ha fully developed would be worth about US$220 million (NZ$300 million).

Shareholders' equity would be a minimum of 60%, perhaps more after another capital-raising.

At full production using a conservative US25c a litre milk price, annual earnings before interest and tax (EBIT) have been forecast at US$40 million, which is a very good return on investment.

During 2009 NZS collected US$30 million from a Uruguayan bond issue which was substantially over-subscribed at an initial 5% interest rate.

That exercise could be repeated.

Assuming the current development plan continues to be debt-funded, net debt would peak around 40% debt-to-debt-plus-equity.

Small shareholder Jim Mutch wants to see NZS get its farm management and development in-house and the irrigation plan completed.

He believes the Olam offer is ridiculously low and that the Uruguayan dairy farm development concept will take five or six years to reach profitability, compared with the three-to-five years originally promoted.

"That's not a long time for a farming venture to pay off and we should keep the faith until it happens," Mutch said.

Cooney added that a sell-out now at a major discount to asset backing would make a large present to a foreign company of the rewards of NZ capital risk and expertise.

All things considered, both PGW's reasons for sale and the NZS small investors' predicament are insufficient to push Olam over 50%.

However, the Olam move has highlighted deficiencies in concept and management of the Uruguayan venture which must be addressed.

It remains to be seen whether independent assessor Grant Samuel reaches the same conclusion, how many NZS shareholders take the Olam offer or if it raises its bid.

  Printable View