$25m better than going to court, says Wrightson

PGG Wrightson manager director Tim Miles says its settlement deal with Silver Fern Farms was more money than it wanted to pay but the company felt it was necessary keep the situation from heading to court.

The rural supplier reached an agreement late on Friday to pay Silver Fern $25 million in cash and issue 10 million shares which at yesterday's price would be worth $12.5 million.

Silver Fern will also keep $5 million already paid to it by PGG of which $3.5 million was already incurred by Silver Fern. The deal is a total package of $42 million - significantly higher than the initial $10 million in cash put aside by PGG to pay for the deal.

Wrightson defaulted last year on an offer to buy a 50 per cent shareholding in Silver Fern for $220 million, when it could not pay the $145 million first instalment.

"I wish that this situation hadn't happened," said Miles yesterday.

"We are paying them more than we felt was required and more than our advice was."

But Miles said it was highly likely that if an agreement had not been reached the deal would have gone to court which would have been expensive, protracted and very negative.

"At the end of the day we just needed to get on with our lives. It's more than we liked but the alternative was probably court."

Miles said it was not appropriate to compare the settlement to the $10 million cash offer as that had also included a procurement agreement.

He would not put a price on the procurement agreement.

Miles said Silver Fern had chosen to go for certainty.

PGG is to borrow the $25 million from South Canterbury Finance at a cost of $2.5 million in interest for this year alone, although the company said that would reduce as a result of the falling interest rates.

One analyst said while the settlement had created certainty for PGG shareholders the debt cost was high and he expected the company to take several years to pay it off.

"They have put on a brave face - but I would think they were devastated by the outcome - it's a lot of money for a failed transaction."

It also added to an already high level of debt the company had.

Another said February's refinancing had bought the company time to trade itself out of its overleveraged position but the added settlement costs were clearly unhelpful.

Miles said he would prefer PGG's debt levels to be lower but had no plans for a capital raising at this stage

"I would rather we had lower levels of debt."

When the company borrowed the money the banks had allowed it to but the market had changed since then. As a result it had agreed to pay back $125 million in debt by the end of 2010.

To do this the shareholders would not get a cash dividend this year - worth an estimated $70 million to $80 million - and the company would undertake a number of measures to improve its working capital as well as collecting a number of debts.

Miles said the company believed it had worked through a number of issues over the past months and ticked them off the list.

"Certainly I believe whatever clouds were there, those clouds should have disappeared."

PGG Wrightson's share price closed up 5c at $1.25 yesterday.