A $220 million price tag for a half-share in Silver Fern Farms is at the top end of an independent valuation of the meat company and includes a 20% discount in return for PGG Wrightson not having control, a consultant's report says.
The 68-page report by Grant Samuel, on the merger of the Dunedin meat company and rural servicing company PGG Wrightsons (PGGW), valued a half-share in Silver Fern Farms (SFF) at between $205 million and $225 million.
"This valuation reflects a discount in the range of 20% to recognise that, despite the fact that PGGW will become the owner of 50% of the shares in SFF, if the proposed transaction is successful, it will not have the control that would normally accompany a shareholding of that level," the report said.
Loss of farmer control in the co-operative has emerged as a key hurdle ahead of the September 8 shareholder vote on a merger, but the report highlights restrictions PGGW would face in governance and the sale of shares and concludes SFF shareholders would not be disadvantaged.
"Grant Samuel believes that existing shareholders are not being disadvantaged by PGGW acquiring a 50% shareholding.
On balance, having a committed partner to assist with a complex transition that has the potential to bring significant benefits to both parties should be viewed positively by existing shareholders."
PGGW would procure stock to SFF's requirements and market forces would ensure farmers were paid a fair price, and the creation of a "hybrid co-operative" would "only marginally" reduce suppliers' influence, the report states.
"The loss of outright control is not material in Grant Samuel's opinion. PGGW is a business totally dependent on the rural community.
"Supplier shareholders ceding some control to PGGW is a small trade-off to pay for the benefits the proposed transaction is seeking to deliver suppliers, SFF and PGGW."
While PGGW would have significant influence, it was paying a substantial sum for that, the report said.
There were also restrictions curbing its control in the board room; it could not increase its shareholding above 50% without constitutional change; it could not sell its shareholding for three years and only then with restrictions and controls on to whom it could sell.
"PGGW is, to a very large extent, a locked-in shareholder with virtually no ability to increase its shareholding or influence and only limited ability to realise its investment."
The investment would transform an undercapitalised SFF, lifting equity to $500 million and giving it scope to invest in capital projects, pursue acquisitions and make it "the financially strongest company in the New Zealand meat-processing industry."
SFF dismissed embarking on its pasture-to-plate integrated supply chain strategy on its own because it would have competed with PGGW, duplicated resources and taken too long to implement.
The lack of duplication of goods and services was expected to result in savings of 25% of combined corporate overheads, with SFF enjoying 55% of those savings, amounting to $7 million a year.
While SFF would use most of the $220 million to retire debt, providing an immediate $20 million gain, the report reveals an intention to invest in robotics, X-ray grading, objective quality measurement, and in-plant and in-market traceability.
If the estimated annual $111 million in long-term benefit identified by the merger was realised, the value of SFF should increase by more than $200 million, the report said.
