Chinese offer that meat co-operative can't refuse

Shanghai Maling would contribute the single largest amount invested in the NZ red meat industry. Photo / NZME

Silver Fern Farms' bankers have cracked the whip on the company's board to fashion a strong deal with China's Shanghai Maling by blocking attempts by other interests to keep the meat processor New Zealand controlled.

The deal enables the banks to exercise a "get out of jail free" card and wipe their debt exposures to a company which until relatively recently has been plagued by inept management decisions, cyclical downturns and a failure to address rampant inefficiencies.

From a banking perspective this makes perfect sense.

The Chinese listed company Shanghai Maling is making a big contribution - the $261 million it will invest is the single largest amount invested in the New Zealand red meat industry.

It will put Silver Fern Farms in a strong position. But that won't stop the emotion over the injection of Chinese ownership into a company that, even late last week, other players were endeavouring to keep New Zealand controlled and owned.

According to informed sources, the banking syndicate had "had a gutsful" after Silver Fern Farms' previous defaults and, while the company was predicting a relatively good year, there had not been many of them in what has been a cyclical business.

If Silver Fern Farms' farmer shareholders vote to form the new operating company - in which the co-operative and Shanghai Maling will each have 50 per cent - the new Silver Fern Farms operating company will be born debt free.

This, with the new distribution links into China through Shanghai Maling and its parent Bright Food, will be of great benefit to Silver Fern.

The question is to what extent the shareholders' votes will be driven by decisions already made by the bankers.

Midway through yesterday's press conference, Silver Fern Farms chairman Rob Hewett gave the pressure game away: "If [we] do not get it over the line our funding is uncertain."

Hewitt also made it clear the company's banking syndicate had no appetite for the competitive late-breaking underwriting proposal which might have left the nation's largest meat processor New Zealand controlled. While the underwriting proposal was good it did not measure up to the Shanghai Maling proposal, whereas the company had banking support for the "game-changer". There was more in a similar vein.

Hewitt's board had funding arranged until the end of October, by which time shareholder support would have to be in place for the new Silver Fern Farms operating company. It's not clear whether the banking syndicate - HSBC, Westpac, Rabobank and CBA - actually threatened outright receivership. But Hewitt said the board's decision was unanimous and it would turbocharge the company's international strategy.

Silver Fern Farms adviser Goldman Sachs has fashioned a sweet deal that works on several levels.

A special dividend of 30c a share will be paid to the co-operative's ordinary and rebate shareholders.

Silver Fern Farms said that in future the new company would pay out 50 per cent of net profit in dividends to its shareholders.

The transaction values Silver Fern Farms' equity at $311 million. This equates to $2.84 per ordinary share, which compares with the 35c share price before their suspension in July.

The governance structure is interesting. There will be a 10-strong board, with five each from Silver Fern Farms and Shanghai Maling. There will also be two co-chairs - Rob Hewett and the chairman of Shanghai Maling.

There is a lot yet to be publicly revealed. Chinese companies don't go into 50-50 deals without also exerting sufficient control to enable them to pocket their investment to full advantage.

There has been talk that Shanghai Maling has suggested it should appoint the chief executive of the new Silver Fern Farms operating company, under strict criteria that the person would be a Kiwi.

These issues will no doubt be traversed by the Overseas Investment Office.

What is also notable is that Shanghai Maling has roughly the same turnover (RMB 10.6 billion 2014 calendar year) as Silver Fern Farms.

If the acquisition of Silver Fern Farms proceeds and it is consolidated into Shanghai Maling's revenue, the reported revenues of the Chinese company will roughly double.

On the Shanghai stock exchange this will be taken as evidence that the company is moving swiftly to further internationalise.

Effectively Shanghai Maling has made an offer that Silver Fern Farms can't really refuse.

The banks want Silver Fern Farms' debt paid down. The banking syndicate has obviously told the board it won't finance competitive offers. It's a good deal under the circumstances.