KEY POINTS:
The value of the proposed part-purchase of meat processor co-operative Silver Fern Farms by PGG Wrightson hits the mark, according to an independent valuation.
The Dunedin-based co-operative has agreed to sell half of itself to the rural services company for $220 million - a stake which independent adviser Grant Samuel valued at between $205 million and $225 million.
The deal is promoted as creating a pasture-to-plate supply chain and a platform for industry rationalisation.
"On balance, having a committed partner to assist with a complex transition that has the potential to bring significant benefits to both parties should be viewed positively by existing shareholders," Grant Samuel said.
PGG Wrightson chairman Craig Norgate had overseen acquisitions and mergers during that company's growth - an approach that could be expected to continue in Silver Fern Farms.
The sale would increase Silver Fern's equity to in excess of $500 million and transform the company from being under-capitalised with limited scope to being able to undertake new projects or pursue acquisitions, Grant Samuel said.
"In addition, if [PGG Wrightson] does not succeed in establishing a strategic partnership with Silver Fern Farms, it could look to take its business to another processor which could place Silver Fern Farms at a competitive disadvantage."
PGG Wrightson would procure all the stock supplied to Silver Fern but would also continue to secure stock for other processors.
"Outsourcing the procurement function is not without risk," Grant Samuel said.
"Silver Fern Farms will rely upon the procurement agreement which will provide for certainty of supply of livestock at a reasonable cost and the fact that [PGG Wrightson] will have a $220 million investment in Silver Fern Farms."
The loss of outright control of the co-operative was not material and the change to a hybrid model would only marginally reduce the influence of suppliers.
"Supplier shareholders ceding some control to [PGG Wrightson] is a small tradeoff to pay for the benefits the proposed transaction is seeking to deliver to suppliers, Silver Fern Farms and [PGG Wrightson]," the report said.
The valuation range included a discount of about 20 per cent because PGG Wrightson would not have the level of control normally associated with a 50 per cent shareholding.
The new board would have four directors from PGG Wrightson, three voted on by supplier shareholders and one appointed by a shareholders council. PGG Wrightson could not carry a shareholder resolution alone but would require 50 per cent support from farmers, while six out of eight directors were needed to pass a board resolution.
Silver Fern chairman Eoin Garden said the report was a compelling endorsement of the proposal.
Federated Farmers Meat & Fibre chairman Bruce Wills said farmers needed to take a close look at the report "particularly if they've still got question marks in their mind and if they're still sitting on the fence."
The proposal needed 75 per cent approval with Silver Fern shareholders due to vote at a September 8 meeting.
"I think they might just slip in," Wills said. "I just sense that the mood is changing."
PGG Wrightson shares closed up 11c at $2.95 yesterday.
