Recapitalised meat processor’s two chairmen will bring different values to business.
The Chinese saying "two tigers can't live on the same mountain" comes to mind when assessing how Shen Wei Ping and Rob Hewett will co-exist as the two chairmen of the newly recapitalised Silver Fern Farms.
Shen is the president of one of four Bright Food listed subsidiaries, Shanghai Maling Aquarius.
Shanghai Maling is a newcomer to the New Zealand commercial scene.
Its sister company Bright Dairy & Food owns a sizeable stake in Canterbury's Synlait Milk and is widely credited with assisting that firm emerge from the GFC in good order.
Hewett chairs New Zealand's biggest meat processor, Silver Fern Farms, and has brought Shanghai Maling to the table with a $261 million deal which will wipe the NZ co-operative's debt and bring the two parties together in a new 50-50 venture.
One is also the Communist Party Secretary of his company, the other a rough-hewn farmer turned business person in charge of a co-operative.
It's too early to say how this will pan out.
Critical planning won't happen until after both parties gain shareholder approval and New Zealand and Chinese regulators give it their blessing.
But Shen is confident that the partnership will be an equal one: "No party will dominate the other party."
Both sides will look after their respective interests. Their roles will each reflect the value they bring to the business.
"For Silver Fern it is definitely important that both partners appreciate the value of the farmers," says Shen.
"The nature of the business will have the farmer as the foundation and we definitely need the support of the New Zealand farmers. And so we need the chair to represent the farmers.
"On the other hand, why we have the Maling chair is because we are the partners to this New Zealand business. We think particularly regarding the Chinese market, given Maling and the parent company Bright Food's penetration of the market position in China, we can bring a big value to Silver Fern.
"So we also need a chair from Maling to represent the interest of the Chinese partners."
Here's the twist. Shanghai Maling has also reserved the rights to appoint Silver Fern Farms' chief executive.
Incumbent Dean Hamilton is understood to have Shen and Hewett's total backing. But when it comes to the next appointment the Shanghai Maling side will hold the pen.
Shen notes that each side will get to appoint five directors.
Maling will include two New Zealanders among their five. The board will decide the strategy and incentivise management to execute it.
Shen Wei Ping is co-chairman of Silver Fern Farms and president of Shanghai Maling Aquarius. Photo / Nick Reed
"Giving Maling the rights to appoint the CEO does not mean we will plan to send any Chinese people to be acting as the CEO for this NZ company," says Shen. "It will be managed by the local team of New Zealand people.
"Maling is very happy with the current management team."
Unlike with Bright Dairy, which sold down its majority stake to 39 per cent at the Synlait Milk IPO, Maling plans to stay at 50 per cent.
While Hewett still has to convince his shareholders to vote in favour of the deal, Shen expects it to readily go through the hoops at the Overseas Investment Office. He distinguishes this deal from the highly politicised Lochinver station deal which was rejected by Cabinet ministers.
"First we invested new money into Silver Fern," he explains.
"So, we will definitely improve the company's current capital structure and improve finance for future development, production-wise, marketing-wise, R and D-wise."
His second point is that Maling is not like a financial investor.
"We are the leading red meat players in China already. We will bring value which will increase the profitability margin by sharing the Chinese knowledge and intelligence with Silver Fern.
"Thirdly, Silver Fern will be the sole brand name under this partnership and everything will be kept in New Zealand. The value add product will be kept in New Zealand so we will increase the job opportunities. We have no intention to take it away. The partnership is to strengthen the value."
By retaining the right to appoint the CEO, Maling will also be able to consolidate earnings, roughly doubling the effective size of the company.
Shen expects the deals will be very good for the share price. The shares are still in a trading halt but earlier rose fast when news of the proposed deal leaked out.
The biggest challenge in front of Silver Fern Farms is intensified competition from red meat players in other territories such as Australia and Brazil.
To cope with this changed competition dynamic, Shen is proposing the parties set up a fully vertically integrated value chain system for beef and lamb in China and globally to create value from the partnership.
"That kind of fully integrated value chain can cope with more intensified competition," he says. "That kind of thing we can control from the sourcing to processing to value added product to end users."
Rob Hewett, chairman of Silver Fern Farms outlines the company's partnership deal with Shanghai Maling at a press conference. Photo / Gerard O'Brien
The distribution company would be 100 per cent owned by Silver Fern Farms ("indirectly 50-50 per cent").
Shen says that will increase the margins as Silver Fern Farms will be the distributors.
"Because we have very strong distribution channels in China, we can help to cut the distributors, increase margins and feedback the insights of Chinese consumers' taste.
"And then increase the processing margin and then finally the farmers' profitability - that is the key value and investment rationale and highlight of the partnership in New Zealand.
"This is definitely the important competitive advantage compared to the other territories' beef and lamb players because they have no brand name. This is our strategy and we will elaborate with our partners in New Zealand. The beauty of this arrangement is we cut the distributors out."
The upshot will be a vertically integrated value chain from the farmers to the processors to the final retailers.
Shen is confident the integrated value chain would also allow NZ farmers' profitability to be increased through higher prices for high quality beef - sharing the premium prices with the farmers who provide quality livestock.
Silver Fern Farms will be the sole processors of their brands here and if Maling can leverage its insights into the Chinese market and get the right product mix that too will lead to increased margins.
So there will be new Silver Fern Farms products produced especially for Chinese tastes.
Shen has talked in detail about this during his recent trip. But packaging "body blood" from beef was not among them.
"What Maling plans to do is assist Silver Ferns to get the import certificate into China because that market in China will be huge."
Body Blood is unlikely to be marketed here.
Maling boss skirts the hot issues
Shanghai Maling's Shen Wei Ping carefully sidesteps questions on the corruption probes against former Bright Group personnel which have seen a former chairman jailed for 18 years and the executive who led the acquisition of the Synlait stake resign recently for "personal reasons".
A Shanghai court recently sentenced Wang Zongnan, a former chairman of state-owned Bright Food Group, to 18 years in jail for embezzlement and bribery over transactions predating his Bright role.
Wang was one of China's most high-profile state executives. He had put the Chinese SOE on the map with the 2012 deal for a majority stake in British cereal maker Weetabix.
Shen's interpreter said "you can pick up from the body language that Mr Shen does not recognise this kind of issue for Maling".
More recently, Guo Benghen - the personable Chinese executive who led Bright Dairy & Food's $82 million investment in Synlait Milk after the GFC scared off New Zealand investors - left mid-year for personal reasons on suspicion of serious disciplinary violations, which is an accepted euphemism for a corruption probe.
Guo's "profits, profits, profits" focus had become renowned at Synlait.
"Of course we all know these things," Shen said through his interpreter. "But it is a personal issue because for SOEs like Maling, they are not like the privately-owned ones.
"So although there are some kinds of executives having this issue, structurally we will be sustained and well kept in future.
"So Mr Shen does not have a problem with those issues."
