Tasman Agriculture shines in bearish market

Tuesday 3rd April 2001

Savvy investors haven't been slow in buying shares in Tasman Agriculture in the last two weeks after a bid by newly-established Dairy Holdings Limited for a 66.1 percent stakeholding propelled the listed dairy farmer into favour as a good defensive stock to hold in a bearish stockmarket scene.

Dairy Holdings Ltd was only incorporated a couple of weeks ago by interests connected with South Island businessmen Alan Pye, Howard Paterson and Allan Hubbard who made the $117-million offer (equating to $1.68 a share) to buy out Brierley Investment's controlling stake in Tasman Agriculture - New Zealand's biggest corporate farmer after Landcorp.

Pye and Paterson, who already own two of the largest farm holdings in Australasia, have a combined net wealth of at least $100 million - and control of assets worth at least double that. Pye and his family own 2300 ha of farmland in and around South Canterbury and nearly 30,000ha in Australia, mainly in Tasmania. This includes Tasmania's biggest station, the 24,000-hectare Rushie Lagoon bought four years ago for NZ$9.9 million. Pye also owns 9000ha in South Australia and Victoria, growing potatoes, onions, carrots and running livestock. His Parilla Premium potato brand is the second biggest processor in Australia and one of the largest potato growing companies in New Zealand and Australia.

Paterson's interests include New Zealand's largest poultry farm, near Christchurch and around 10,000ha of farmland, mainly in Otago and Southland, part of which he is developing into the world's largest deer farm. Paterson is also a significant shareholder in investment company Southern Capital as well as the bio-med A2 Corporation. Hubbard is also one of New Zealand's richest people with an estimated net wealth of $55 million. His family interests own South Canterbury Finance, the country's fifth largest finance company and like Pye and Paterson, he has steadily built up extensive agricultural interests.

Over the years, Tasman Agriculture has been very successful in buying beef or under-developed properties and converting them to higher yielding dairy farms. Last June, TasAg shareholders agreed to a strategic sell-down of the company's New Zealand assets and so far, 36 of its 64 farms have been sold or sale agreements reached - for a total of $128.23 million. The excellent returns achieved by dairying have sharply pushed up the value of those properties with prices being about 21 percent above valuation. On June 1, the company will receive settlement of $121.3 million with the rest to be paid a year later. In fact, Pye and his family have been the biggest single buyers of the properties sold down by TasAg - having bought six dairy farms from the company last October for more than $34 million.

The $20 million gain over book value, from the sales, would be included in TasAg's annual results for the year to 31 May 2001 which would effectively give the company an estimated net tangible asset backing of $1.78 per share. It is therefore little wonder many analysts believe that Dairy Holdings is getting a bargain in the deal to buy out Brierley Investments at what equates to $1.68 per share. However, small investors appear not too slow off the mark either (and getting an even better 11% discount to NTA) in snapping up TasAg shares which have been trading around the $1.60 mark in the last week.

Some market observers believe that the involvement of Paterson with Dairy Holdings may see a possible closer relationship in New Zealand between TasAg and the A2 Corporation, of which Paterson is a major shareholder. A2 Corporation owns patent rights arising from the discovery of links between the consumption of beta casein A1 milk and both coronary heart disease and Type 1 diabetes. The company plans to list on the main board of the New Zealand and Australian stock exchanges by mid-year. TasAg already has an exclusive licence agreement with A2 Corp to commercialise the A2 technology in Australia.

Smaller investors will also benefit from the Dairy Holdings deal with Brierley Investments which is conditional on TasAg returning a minimum of $107 million to shareholders prior to the transaction. BIL would receive 66.1 percent (or $70.7 million) of that distribution which would be deducted from the Dairy Holdings purchase price of $117 million. TasAg says that a decision to proceed with a distribution/share buyback, or the extent and nature of the distribution/share buyback, has not yet been made by the TasAg board but would be considered further over the next few weeks.

Acquisition of TasAg will most certainly allow Pye, Patterson and Hubbard to further develop their already extensive agricultural interests. And most certainly, the market will be expecting some strong indication of Dairy Holdings' future plans for TasAg after June 15 when the deal is expected to be finalised. Pye meanwhile is revealing nothing except only to say that he anticipates making changes in Tasman Agriculture's future direction. "We've got certain ideas and we'd like it to happen tomorrow but unfortunately, it doesn't work like that," he said.

After June 15, and all things being equal, Dairy Holdings will control 66.5 percent of a company which will have 28 New Zealand farms (representing 6,693 hectares) and two conversion properties (totalling 709 hectares) on its books. TasAg will still own 23 dairy farms in Tasmania and also be the beneficiary of a possible NZ$6 million in total from the Australian Government's NZ$2 billion dairy industry adjustment package. The predicted end-of-season payout of $4.80-$4.90/kg of milk solids in New Zealand and A$3.40/kg of milk solids in Tasmania, coupled with similar expected payouts next year, are all further positives for TasAg - seen by many as an excellent defensive stock in a bearish market.

Alan Pye readily admits that the bid to buy out Brierley Investments is an expensive exercise, with shares trading (when Dairy Holdings made its offer) at about $1.48 - well below the $1.68 offered. The market can reasonably expect to assume from this that he, Paterson and Hubbard intend to realise a handsome premium from Dairy Holdings' investment in TasAg before far too long!

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