Challenge to Olam never eventuated

06-09-2010 | Hugh Stringleman

Rather than look for a new cornerstone shareholder, the directors of NZ Farming Systems Uruguay
(NZS) have been convinced to go with the one they have.

That is Singaporean primary industries investor and food chain specialist Olam International. The NZS white knight, rumoured to be another Singaporean investment fund, never got on its
horse.

Olam increased its share offer to 70c, built a strong position (Farmers Weekly, Aug 30) and its representatives put a convincing case about
capital raising and continued farm development.

Last week NZS directors recommended to shareholders acceptance of the Olam offer in respect of at least part of their shareholding.

Olam has 37% of NZS shares, including the
11.5% PGG Wrightson and 7% ACC stakes, and
wishes to get over 50% for control. Until the acceptance recommendation smaller NZS shareholders had not sold, because there may have been a higher offer.

Smaller shareholders now have to consider how much of their NZS shares to sell to Olam, and the risk of being locked in without influence.

An individual's decision to sell only a portion of shares could be swamped by a tide of sales.

However, given the company's need for more capital to complete the 40-farm dairy venture in Uruguay, and Olam's assurances of further funding with fund raising equitable to all, plus the patchy governance record to date which had dragged the share price down into the low 40s, the outcome would seem to suit most shareholders.

Under the stock exchange rules, Olam must bid for full ownership, which values NZS at $170 million.

Where it will be happy to stop remains unclear. However, it has undertaken not to make a subsequent higher offer within one year.

Olam has also suggested that smaller share-
holders sell a portion to generate cash for a planned rights issue at what might be a slightly reduced
price.

This indicates Olam would be comfortable with 50%-plus and partnering with a group of smaller NZ shareholders who have renewed their commitment.

Olam will have at least two directors on the NZS board and its track record of food trading and agricultural investment around the world brings confidence to the future of NZS.

Vivek Verma, managing director of the coffee and dairy divisions, said he met a group of sizeable dairy farming shareholders in Taranaki last week and he "was surprised by the level of alignment".

That comment was before meeting the NZS board and the subsequent recommendation.

Verma said NZS had tried to replicate the NZ dairying model in Uruguay and while there are many competencies that can be transferred, there are differences in soils, climate and the business environment.

"The grass growth is not as good and the need for supplements higher, and we believe the NZS board has now come around to our way of thinking," he said.

Olam is willing to review its assumptions about the lesser suitability of land in the east of Uruguay for dairying.

It does not foresee trading with NZS milk production for two or three years while farm development is completed, leaving that with Conaprole, although Olam does move 250,000 tonnes of dairy products annually.

Already known in NZ through its stake in Open Country Dairy, Olam reported $10 billion of revenue in the year to June 30, earning net profit of $360 million and it has equity of $1.77 billion.

It introduced a new policy of investing in upstream farming operations around the world and is now involved in peanut farming in Argentina, almonds in Australia, palm and rubber plantations in the Cote d'Ivoire, Ghana and Nigeria, rice farming in Nigeria and timber forest concessions in Gabon and Mozambique.

The two early stage upstream projects are coffee in Laos and dairy farming in Uruguay through NZS.

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