Has PPCS done its dough on its Richmond ram raid?

Friday 26th April 2002

Two South Island-based attempts for control of large listed North Island meat companies have run into trouble during the past month.

The Dunedin-based successful meat co-operative PPCS has paid about $47 million for a 36% stake in Richmond Ltd, New Zealand's biggest meat company.

But it hasn't yet reached a controlling position in a company with a market valuation presently of $94 million (41 million shares at $2.29) and it is now facing a long High Court extension to its four-year battle for control of Richmond.

Family-owned Talleys, of Nelson, has already spent up to $20 million gaining a 20% share of Affco, the other big listed North Island meat company, valued by the market presently at $88 million (275 million shares at 32c).

But Talleys has been effectively blocked from going further in control of Affco by a special meeting of shareholders which refused permission for Talleys to go over 20%, as was sought under the new Takeovers Code.

Talleys wanted to purchase the 10.5% of Affco owned by construction millionaire and South Auckland farmer Hugh Green and it was prepared to pay 38c.

Many commentators, and smaller shareholders, hailed Talleys as the saviour of a consistently underperforming Affco.

The pivotal decision was that of corporate farmer Peter Spencer's Toocooya Nominees (with 18% of Affco) to abstain from voting and thereby deny Talleys the approval it sought.

Theories about why Mr Spencer (who lives in London) abstained and therefore shut the door on Talleys' generous offer, which might have flowed on to other shareholders, range from the cockup to the far-fetched.

One convoluted reasoning says Spencer is keeping his options open with the Affco shareholding so as to be of further assistance to PPCS if and when it is finally thwarted by the Hawke's Bay squattocracy and turns instead to the Old Lady of Tooley St (Affco).

Toocooya sold a 10% stake in Richmond to PPCS in late 2000, setting the southern raider off on its third attempt to take control of Richmond.

When PPCS added some shares bought in the market and a 49% share in Hawke's Bay Meats, generously offered by Paul Collins' Active Equities at $3.65 per Richmond share equivalent, it was well on the way to victory.

But at what cost? Leaving aside the big expense of the two previous attempts, during which the share price of Richmond rose very nicely for the HB farmers, the total of the latest foray is sobering.

PPCS spent an estimated $20 million on the market purchases and the Toocooya stake which raised it to 16.7% of Richmond.

It then spent $27 million on the half share of Hawke's Bay Meats. It has an option to secure the remainder of the Active Equities interest before September 2003.

At that time it could conceivably have spent $69 million (valuing the last parcel at $2.50 a share) for just over half ownership of a company the market thinks is worth less than $100 million.

At present the market is undervaluing both Richmond and Affco compared with their asset-backing, because of the poor profit performance of northern meat companies.

Last week's receivership of family-owned Lakeview meat processor Levin is being blamed on the aggressive competition for farmers' stock supplies between meat companies, which inevitably has the effect of stifling profitability.

Green has been a cornerstone investor in Affco for years and never had a return. Spencer is in the same boat.

Down south the farmers who own the two big co-operatives (PPCS and Alliance) pride themselves on canny investing and profitable trading.

Does $69 million spent for control of Richmond, which might be able to pay a dividend of 10-20c this year and has yet to declare its interim result, seem like wise buying?

Wouldn't PPCS feel unwanted and underappreciated as a result of the staunch rearguard battle to prevent it gaining control of Richmond? And having gained control, would changes of key personnel such as chairman Sam Robinson and CEO John Loughlin make Richmond perform any better?

More likely, farmers' fears of much lower livestock payments would come true, resulting in an exodus of suppliers to alternative processors.

Institutional investors and smaller shareholders are underwhelmed at present with the financial fortunes of both major North Island processors, during a year in which, theoretically, they should both do very well.

Affco says its interim result will be below expectations and, on the basis of last year's declared profit of $1 million, the company has a very long way to go to its prospectus forecast of $14 million for this full year.

Richmond made $20 million last year but then paid only 5c, when its net earnings a share were 50c and the prospectus payout forecast was 10c. Its interim result announcement will not be until May 30 but chief executive John Loughlin has forecast an "outstanding year" in progress.

PPCS shareholders had better hope he's right.

And the Talley family is going to have to come up with a new strategy for making value out of Affco.

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