To be frank I did consider the presentation to be more
of a hard sell of the proposal to shareholders as opposed to the provision of
all the facts to shareholders for consideration.
A lot of the presentation was on how good their “Plate
to Pasture Strategy” is and will be and how much SM wanted to be part of it as
opposed to the nuts and bolts of the JV.
As most pundits are predicting I think it will go
through, however, in an ideal world I would like to see it remain as a
cooperative for the following reasons:
1. One
of the reasons share price of a cooperative is generally of little consequence
to a farmer is what we are worried is how much we are going to be paid for the
animals we supply, that is what we want to see maximised. However the tension that comes with this
50/50 joint venture is that the cooperative half of the JV (in theory) requires
the company to maximise what it pays to farmers for the animals they supply,
while SM have an obligation to its shareholders to maximise their returns. These obligations are very different are in
direct conflict with one another: the more you pay farmers the less of course
you can return to SM’s shareholders.
Now while there is still
strong competition in the meat industry and primarily Alliance succeeds (being
the only remaining cooperative), then I don’t think there will be any major issue
as the JV will have no alternative but to pay farmers, at the very least the
same as its competitors. But the risk is
years down the track if the likes of Alliance and perhaps other companies tank
and fail, SM (which SFF pointed out repeatedly at the Road show is essentially an
SOE (State owned enterprise owned by the Chinese Government)) and as such has
very deep pockets it clearly has the ability to take advantage of any financial
weakness it may perceive.
The cynic in me would
suggest that is why SM have put up a lot of money for 50% i.e. equal
control. If SM put up a bit less money
for 40% ownership, then surely this would still provide all the same so called
access and capital advantages SFF has been promoting on their road show, but
the control of the JV would clearly remain with the cooperative farmer
shareholders. I would imagine that SM
would never been interested in such an arrangement.
2. SFF
when questioned about such a JV leading to a procurement war were quick to say
that it has no intention of doing this. However
there denials of this happening is basically only rhetoric, I am sure that the
SFF Board before the 2012 season (I think 2012) would have made similar
statements before dramatically overpaying for stock that year. Again as SM is
essentially owned by the Chinese government and accordingly has very deep
pockets it has the ability, particularly if in the future its’ competitors are
in a precarious financial position, to pay well over and wear the loss if it
means destroying its competition. I
reiterate you need strong competition to ensure the farmer is getting paid the
best price for the animals they supply. This is a worst case scenario however
it is a risk associated with such a 50/50 joint venture. This would also depend on farmers, if many
decide to change suppliers from SFF, I am sure this JV will be looking to pay
what is required to get a minimum throughput at least. I think we all agree that any procurement
war that is not based what the consumer pays at the end is not good for the
industry.
3. SFF
put a lot emphasis on how brilliant their plate to pasture strategy is and it’s
the only one of its kind. I hope it is,
but given they emphasised how:
·
much they have reduced debt levels;
·
there was no plan B if shareholders did
not vote for this JV;
·
they will have real issues obtaining the
appropriate funding from their banks if this JV does not go ahead.
All this begs the
question what are the banks concerns about this strategy and SFF’s management given
a bank before lending money has to evaluate risk etc associated with it.
Surely if SFF is well
managed, has a good marketing strategy and have shown in the past years how it
has lowered its financial vulnerability (dramatically reduced debt levels) it
would be nice to know why the banks have major concerns, as clearly that’s how
a bank makes money, by lending it!
4. Any
extra value the JV does succeed in obtaining in the market for their meat, only
50% is likely to come back to the farmer
supplier, as clearly the other 50% will be going back to SM’s
shareholders. The only way all such
incremental value gains will be returned to the farmer supplier is if its
competitors are also succeeding in gaining the same increase in value; for
example presumably and hopefully Alliance being a cooperative would return all
such gains to its farmer suppliers and as such this JV would have to pay its farmer
suppliers a similar price to its competitors.
I think this will go through as many farmers will see
it as a way of getting some cash out, but also because no real alternative has
been put forward. The risks outlined
above are very real, how risky is another matter, which is very dependent on
the competition. If we have good competition that is also financially strong
then the risk is minimal, but if not, who knows what our meat industry will
look like in 10 to 15 years.
