PGG Wrightson is selling its finance subsidiary to Heartland Building Society for about $100 million, but as part of the deal will have to provide up to $100 million for a group of the subsidiary's impaired or restructured loans, and will buy $10 million of new Heartland shares.
In an explanatory note on the deal dated today, PGG Wrightson said the purchase price to be paid by Heartland would be an adjusted value of the net tangible assets of PGG Wrightson Finance, estimated to be about $102m on the day of sale which is expected to be August 31.
As part of the sale, Heartland had required PGG Wrightson to retain some loans made by Finance.
Those loans were mainly impaired or restructured and would be sold by Finance to a newly-established subsidiary of PGG Wrightson at net book value, with the purchase price being about $85m to $100m. That would be funded by PGG Wrightson from the proceeds of the Finance sale, the note said.
Of the remaining funds, if any, up to $10m would be used by PGG Wrightson to subscribe for ordinary shares in Heartland's parent Heartland New Zealand as part of a capital raising of at least $55m to support the proposed transaction. If insufficient funds were available to fund the subscription, PGG Wrightson would use its cash reserves.
Heartland had also required that about $30m of loans made by Finance be guaranteed by PGG Wrightson for three years. Heartland could require PGG Wrightson to buy any guaranteed loan that became impaired.
Among conditions of the deal are approval from PGG Wrightson and Heartland shareholders, the Heartland capital raising and relevant regulatory consents. Chinese firm Agria has just over half the shares in PGG Wrightson, with a shareholders' meeting scheduled for June 28 in Christchurch.
In an appraisal report on the deal, Northington Partners said the proposed transaction was fair from the point of view of PGG Wrightson shareholders.
That was even though, on the face of it, the loans excluded from the deal or those guaranteed for three years were detrimental to PGG Wrightson because it would bear the full cost of any further write-offs in relation to those loans, the appraisal report said.
But without those arrangements it was likely Heartland would have required a significant discount to the purchase price. PGG Wrightson believed such a discount would significantly overstate the risk of further losses.
So it was in PGG Wrightson's best interest to accept the ongoing exposure to the identified loans in return for achieving a purchase price close to Finance's net tangible assets.
PGG Wrightson chairman Sir John Anderson said the new special purpose vehicle taking over the excluded loans would work to realise or refinance those facilities in the short to medium term.
The move to sell Finance was part of PGG Wrightson's strategy to focus its resources on its core business activities as a provider of agricultural products and services.
