More than China option in Silver Fern play

NZ's beef trade with China grew by 27 per cent in the past year. Photo / Getty Images

Will a Kiwi white knight emerge to fully recapitalise Silver Fern Farms, or will Chinese interests emerge as 50-50 partners with a New Zealand consortium to take the company forward?

These are just some of the tantalising options doing the rounds.

Silver Fern Farms desperately needs to be recapitalised.

Its banking facilities expire in October and it needs, at the very least, a capital injection of $100 million to strengthen its balance sheet.

That's the rationale behind the SFF board's decision to mandate Goldman Sachs to seek a prospective equity partner which would bring not just capital, but processing expertise, international market clout and distribution networks in key growth markets like China or Latin America.

Speculation that a 50-50 deal with a Chinese partner is close to finalisation grew this week after various shareholding interests received confidential briefings on the prospective arrangement.

They have been told that New Zealand would not lose control to the proposed Chinese partner and that the deal is being crafted on a win-win basis.

Goldman Sachs also secured interest from the Brazilian firm JBS, the world's largest meat processing company.

But it is thought that the Chinese partnership offered a more attractive pathway for Silver Fern Farms to boost its penetration of the Chinese beef market.

NZ's beef trade with China grew by 27 per cent in the past year - a bright spot for NZ's agribusiness producers at a time where the dairy sector's exports to that market have fallen.

Also in the mix is a late attempt by NZ-dominated interests spearheaded by the Meat Industry Excellence group which has formed a New Co vehicle to finally persuade the major interests to combine to form a major meat company.

The question is whether MIE has left its run too late.

And are various competitive interests playing up dire prospects of what might happen if China emerges with a significant stake to secure their own commercial interests?

If the Chinese deal goes ahead it would be expected to sail through the Overseas Investment Office.

There will certainly have been soundings at political and bureaucratic levels.

Reliable sources say what is on the table is a true 50-50 partnership.

What's not clear from the scuttlebutt is what the makeup of the New Zealand stake will be in a recapitalised Silver Fern Farms.

Will existing farmer shareholders continue to hold 50 per cent of Silver Fern Farms, or, will a NZ-dominated consortium join the Chinese firm to take over the company altogether?

In this case, the company would formally cancel its co-operative structure and simply contract in supply.

Or will the NZ consortium of interests get behind the MIE proposal?

There are a number of NZ firms with the capacity to take part in a consortium, such as Anzco Foods which - like Silver Fern farms - is a major beef exporter to China.

Anzco's executive chairman Sir Graeme Harrison has strongly supported injecting NZ agribusiness producers into major international value chains through either shareholdings or partnerships as was the case with the Japanese interests in his firm.

A number of major Chinese interests are understood to have been sounded out by Goldman Sachs.

Among them were China's two major meat processors, WH Group, formerly known as Shuanghui Group, and giant state-owned enterprise China National Cereal, Oils and Foodstuffs Corporation (Cofco).

WH has been on the acquisition trail - it bought Smithfield Foods last year paying US$4.7 billion for the US meat producer, and is actively seeking to shore up food supply lines to China.

China has a number of SOEs operating in the food space.

Cofco was looking to make a deal with Fonterra in China, but it backed away after the false botulism scare.

Cofco chairman Frank Ng is very familiar with New Zealand's potential in the agribusiness space and is on good terms with leading NZ business people and politicians. Cofco is expected to become more powerful now that the State Council has approved plans to overhaul the SOEs along the Singapore Government's Temasek model.

The various food sector SOEs are expected to be grouped together under the new model which - via Temasek-styled holding companies - will put some distance between the Chinese Government and its commercial operations.

China is already Silver Fern Farms largest market by volume through its exports of low-mid range lamb and beef cuts.

This year, it diversified its range of products in China and has been looking to tailor them to high-end Chinese tastes through a premium consumer brand promoted through online channels.

It's clear that the right deal with the right player at the right price could take the company forward.

But there will be a lot of resistance from politicians like NZ First's Winston Peters to that happening.

While on Chinese agribusiness deals ... Pengxin's bid to acquire Lochinver Station is still in front of the Overseas Investment Office some 14 months after the application for approval to buy the asset was made.

There has been a huge backlog in getting OIO applications approved. Lawyers acting for foreign applicants have been loath to go public.

But there has been a great deal of behind-the-scenes tension across the board, with foreign applicants having to be reassured that the reasons for the delays are not political.

The good news from an impeccable political source is that the Government is finally poised to beef up the OIO.