Olam to tap shareholders for funds if Farming Systems tilt successful

Milking cows at one of NZ Farming Systems Uruguay South American farms. Photo / Supplied

Olam International will look to tap shareholders to address New Zealand Farming Systems Uruguay's funding shortfall if the Singapore-based company succeeds in its takeover bid.

The Singapore-listed food and ingredients conglomerate says Farming Systems was "unrealistic" in setting its operational targets, and needs significant changes to its strategy, according to the company's offer document. Farming Systems reliance on farm sales is "undesirable and unsustainable" as a source of short-term funding, Olam said.

"It is Olam's view that given NZFSU's performance history and financial situation, equity is a more appropriate source of funding as compared to additional debt," the document said.

"Olam believes that NZFSU may need to call on shareholders to support one or more equity capital raisings."

Olam is offering shareholders 55 cents apiece after it entered into an agreement to purchase PGG Wrightson's 11.5 per cent stake in Farming Systems subject to regulatory approval, valuing the target at $134 million.

The Singaporean company said the takeover will let it "realise significant cost advantages and the advantages of backward integration into dairy farming," in a statement lodged with the Singapore Exchange. "The company believes that running such a business in Uruguay, as opposed to certain other countries would be relatively more cost effective."

The offer document said Farming Systems has been "consistently failing to meet its stated targets" and setting targets that Olam doubts it will be able to meet. It was also critical of the land owned by Farming Systems, saying its productivity levels are lower than traditional dairying areas in central and western Uruguay.

Farming Systems chairman John Parker disputes some of the assertions in the document, and advised shareholders not to accept the offer until it releases a target company statement and independent adviser's report on Aug. 23. The shares were unchanged at 55 cents in trading today.

The company last year managed to raise US$30 million through the sale of bonds in Uruguay having postponed its capital raising plans in October 2008.

Olam has been actively seeking to add to its food production assets. In 2008, it acquired 25 per cent of Dairy Trust, the owner of cheese maker Open Country Cheese, which is currently the target of an upstream takeover from the Talley's Group via their bid for Affco.