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Forsyth Barr researchers were sceptical meat company Silver Fern Farms (SFF) would be able to capture all the synergies from the partnership without industry consolidation and were also concerned at the extra debt PGG Wrightson (PGG-W) was incurring to fund the investment.
Without additional industry consolidation, the PGG-W partnership with SFF was viewed as simply recapitalising SFF's balance sheet.
"The existing industry procurement model will ensure the processors continue to bear a disproportionate share of the commodity price risk and consequently heightened earnings volatility," Forsyth Barr said.
There was uncertainty the anticipated savings from synergies of $59 million a year in the short term and $111 in the long term could be achieved, and there was also risk whether they would be achieved from the value chain.
"Apart from the uncertainty of actually achieving the full projected synergies, there is considerable risk as to where the synergies accrue in the value chain. Without industry consolidation, there is every chance any benefits will be competed away."
PGG-W has raised $115 million in equity and $125 million of debt, which increased its gearing from 39.4% to $42.3%.
Two cornerstone shareholders, Rural Portfolio Investments and Pyne Gould Corporation, own 51.6% of PGG-W and the report speculates any capital raising would involve new equity partners.
The PGG-W partnership with SFF was sold to SFF shareholders on the basis of shifting the meat company from being production driven - processing as many animals as possible to keep fixed costs low - to year-round production of product to consumer requirements.
PGG-W would procure livestock to SFF's specification and provide farmers with advice on animal genetics, nutrition, agronomy, finance and farm supplies, while SFF would provide processing and technology, logistics, marketing and branding.
Before shareholders voted, PGG-W chairman Craig Norgate said its return on investment was having profitable sheep and beef farmer clients enjoying higher product prices created by the new marketing and processing model.
Mr Norgate has also supported industry consolidation, but previous attempts have failed and there appears little desire for a new attempt.
The report acknowledged PGG-W reported a stronger-than-expected ebita (earnings before income tax and amortisation) operating profit for the 2007-08 financial year of $83.8 million, ahead of Forsyth Barr's expectation of $78.1 million.
It also said trading conditions were improving for the rural servicing company, with better prices expected for beef and lamb, a "robust" outlook for dairying and continued efficiencies from within the company.
"We believe the full-year 2008 performance indicates that the long-awaited benefits of the Pyne Gould Guinness and Wrightson merger are beginning to be captured by PGG-W," the Forsyth Barr report said.
PGG-W chief financial officer Mike Sang said the company tightened credit markets meant that what was acceptable gearing 18 months ago was considered leveraged today.
The company's banks were comfortable and he said PGG-W would rebalance its balance sheet in the next year, but it would take time to implement.
Forsyth Barr sharebrokers' financial disclosures are available on request.