Partnership represents new direction for meat industry

Silver Fern Farms (SFF) and PGG Wrightson (PGW) have today announced a partnership proposal under which PGW would purchase a 50 percent shareholding in SFF and they would work together to lift the earnings of New Zealand meat producers. The partnership would create an integrated supply chain “from plate to pasture” – with every stage geared to meeting the needs of meat consumers around the world.

On approval, the proposal will see PGW take a 50 percent stake in SFF for $220 million, resulting in a hybrid company structure that retains the governance and supplier benefit elements of a co-operative.

SFF will pursue market strategies targeting the growing international ranks of consumers demanding high-quality and consistent meat products from traceable and sustainable sources. The SFF and PGW chairmen, Eoin Garden and Craig Norgate, said the market goal would be to reposition New Zealand meat as the ethical protein source for this growing, and increasingly affluent, consumer category.

Mr Garden and Mr Norgate say the heart of the proposal is the formation of a truly integrated supply chain – on a ‘plate to pasture’ model – with every link in the chain geared to meeting the needs of international meat customers. “There are very clear synergies, in terms of cost and performance benefits, that both parties bring to the table. These translate to more money in the pockets of SFF’s suppliers, and benefits to its international customers in the form of year-round supply, grower identification and product tracing, to name but a few.”

Under the proposal, the relevant parts of the two companies will work together on a complementary basis. PGW will provide access to advisory and other services inside the farm gate, and procurement for prime and store stock. SFF will provide its processing capacity, technology and expertise in logistics, marketing and branding.

Short-term gains to suppliers will include:

* Increased information about customer needs – and thus a better basis for farm decision-making
* Guaranteed-price supply agreements – short and long term – increasing certainty and reducing risk
* Guaranteed processing space for commitment to supply
* Finishing programmes
* Finance on livestock – especially where it is committed under supply agreements
* Store stock finance advance – especially where purchase is for supply in winter months
* Access to on-farm check-up, reviewing current livestock policy and financial outcome
* Access to an expanded set of specialist knowledge in fields including animal breeding, nutrition, health, pasture, livestock finance and ancillary services.

 

Mr Garden says the directors of SFF believe the proposal will be endorsed by the company’s stakeholders, including the required approvals by rebate suppliers, given its immediate and transparent benefits.

“An evaluation undertaken by PWC on behalf of the two companies has identified prospective short-term gains of more than $60 million per year, with longer-term financial benefits ranging up to $110 million per year,” Mr Garden says. “This does not factor in further gains anticipated to flow from a more efficient procurement model, nor from the participation of other companies, which would spread the improved economics across a broader supply base. Benefits are expected to accrue to farmers as suppliers, to farmers and PGW as shareholders in Silver Fern Farms, and to PGW directly.”

Mr Norgate says both companies share the view that investment in an integrated supply chain is the key to unlocking the value of high-quality New Zealand meat. “There is clear growth in the global protein market, so we need to build a structure to ensure that there is a stimulus to investment in the meat industry on a par at least with dairy.

“SFF is on the right road already in the form of its marketing and consolidation initiatives. We see our investment in SFF as an important step towards consolidation of the industry, with the benefit of enhanced supplier returns through rationalisation, marketing integration and a move to an Annual Equity Value (AEV) share model.

“Just as Silver Fern Farms is making changes to its business, PGW recognises that it needs to work alongside its clients to ensure their needs are met. Our future strategies are very much aligned with SFF. They involve striving to improve returns for agricultural producers by facilitating change – change we must all embrace. Our investment can be seen as a substantial vote of confidence in the future of the industry,” Mr Norgate says.

Messrs Garden and Norgate believe the cornerstone of the venture will be the fact that the two companies have highly complementary capabilities and resources. “The partnership will allow the capabilities of the two organisations to be combined in the most effective way and deliver the integrated supply chain to the benefit of all participants.”

 

Transaction structure

The partnership is based on a mix of financial and organisational elements.

* The procurement operations of SFF and PGW will be integrated under an agreement between the two companies.
* PGW will subscribe $220 million ($145 million on completion, and $75 million plus interest by 1 March 2009) for a 50 percent shareholding in SFF.

 

The funds invested by PGW will be used to provide SFF with financial flexibility to fast-track the change programme already under way, invest in process improvements and position the company more attractively to progress industry consolidation.

The co-operative structure of SFF will remain, with the rights enjoyed by suppliers protected in the Constitution. Board composition will balance the interests of PGW and SFF suppliers – with a total of eight directors (three elected directly by suppliers, one appointed by a Shareholders’ Council to be formed and four appointed by PGW). Mr Garden will be the inaugural chairman under the new structure.

The Shareholders’ Council will be established to represent supplier interests through consultation on strategic, supplier and related issues and through the director appointment described above.

PGW and SFF have signed a heads of agreement. The transaction remains subject to completion of definitive documentation, banking approvals, approval by SFF rebate suppliers and to other standard matters. Information will be made available over the coming weeks, with SFF shareholders meetings expected to be held in July and August ahead of the vote.

Operational integration

The integrated supply chain will be implemented through an operational partnership of SFF and PGW.

PGW will provide access to on-farm advice and other inputs (extending to animal genetics, nutrition, and health, agronomy, production technology, livestock finance and farm supplies), and stock procurement (merging the SFF procurement and PGW livestock functions).

SFF will provide processing and technology, logistics, marketing and branding.

Collectively, the companies will offer commitment to research and development, investment in technology and industry consolidation – in plants in New Zealand and in marketing offshore.

Further industry consolidation

Both companies see this transaction as a precursor to further necessary consolidation of the meat industry.

Both see the integrated supply chain as the best basis for further consolidation – a model that is significantly stronger than consolidation between processing companies only.

Financial gains

Analysis of the changes enabled by the proposal has identified three categories of financial gain:

* prospective short-term gains of more than $60 million per year, with longer-term gains ranging up to $110 million per year. These are expected to accrue variously to farmers as suppliers, to farmers and PGG Wrightson as shareholders in Silver Fern Farms, and to PGG Wrightson directly.
* further gains that cannot be quantified at this stage because they will be identified (and increase) as the integrated supply chain takes effect – eg. gains arising from farmer commitment to supply agreements
* further gains from the participation of other companies, spreading the improved economics across a broader base of supply