SFF in tight spot over PGGW shares

Silver Fern Farms faces an unenviable decision about what to do with its 10 million shares in rural servicing company PGG Wrightson, which have halved in value since being issued in April.

The shares were part of a $49.6 million settlement package from PGG Wrightson (PGGW) for failing to complete last year's partnership with the meat co-operative, but since then the value of PGGW's shares have fallen from $1.20 to 62c.

Craigs Investment Partners broker Chris Timms said lurking in the background was the possibility PGGW could have a rights issue to attract some desperately needed fresh capital.

While the company has not announced plans to do so, Mr Timms said it had few alternatives to improve its debt equity ratio.

Silver Fern Farms (SFF) said last month it intended selling all or part of its stake in PGGW, but Mr Timms said if PGGW had a rights issue before then, SFF could have to participate to preserve its investment.

Another alternative for SFF was to sell its shares sooner, but to do so could be at a discounted price because a new buyer faced the same issue of also having to participate in a rights issue.

"It [SFF] is stuck between a rock and a hard place.

"If it wants to sell now or find someone to sell them to, they would have to sell at a discounted price."

In April, when SFF and PGGW reached their agreement, the share package was worth about $12 million.

Today, it was worth half that.

SFF has just completed a rights issue of its own, which has raised about $21 million, less than initially hoped for.

Mr Timms said the meat company might decide to cut its losses and cash in its shares to bolster that capital.

"Given the low uptake, they might need to consider selling those shares, particularly with a possible rights issue with PGGW."

PGGW has to address its debt levels, which at the end of last financial year were $526 million, up $48 million on the previous year.

As a result, equity fell from $480 million to $391 million at balance date.

PGGW has reached agreement with its banking syndicate to repay $200 million by March 31 next year, and it has banking agreements covering working capital and debt repayment.

In addition it includes a term debt facility of $198 million which has been extended another year to August 31 2012, working capital facilities of $75 million that expire a year later in August 2011, overdraft and guarantee facilities worth $40 million and an agreement with South Canterbury Finance extended to 2013.

SFF also has banking and debt repayment agreements in place with its financiers, but it has to settle or reach agreement to roll over $75 million in bonds which mature in December next year.