The Shoeshine Column: Gate shut to swede-eating barbarians

Friday 18th August 2000

It was a battle worthy of the dying days of the Roman Empire. On one side the well-bred, collegiate farmers of Hawke's Bay, softened by the fat of their gentle and fruitful land.

On the other, the Terror from the South, swede-eating barbarians from the depths of Otago and Southland.

For a year and a half Dunedin-based PPCS has struggled to win control of Napier-based meat processor Richmond Ltd. The battle has swung this way and that.

Now, it seems, chardonnay, linen and art deco have won the day and the invaders have been driven back to their frosty hills.

The battle is won but is the war over?

The corporate equivalent of Hadrian's Wall is in this case Hawke's Bay Meats. A subsidiary of former Brierley Investments executives Paul Collins, Bruce Hancox and Patsy Reddy's Active Equities, HBM now owns an unassailable 36% of Richmond and Collins and Hancox have taken seats on the nine-member board.

Down in Hawke's Bay, however, some are questioning whether this arrangement is quite what it seems.

The background to all this is, as ever, continued overcapacity in the meat processing industry. In recent years the industry has been hamstrung by a stock shortage. As processors competed for dwindling numbers of beasts to put through their plants producers ramped up prices and processor profitability suffered.

The effects were plain to see. Fortex went belly-up in 1994. In 1998 Affco posted a $73 million loss.

Even when the processors have been in the black it hasn't been by much. Last year Affco made $6.5 million, on total assets of $226 million.

In this situation nobody, clearly, is keen to build more plants. So when PPCS was looking for ways to expand, it set its sights on Richmond.

The rationale was fairly clear. Because of milder weather and more abundant grass growth the North Island processing season is about two months longer than in the South Island, so North Island operators get to export more.

Of the four other major processors, Alliance is, like PPCS, a co-operative and so immune to takeover. Anzco is a private company. Affco, as noted, suffers from profitability problems.

That leaves Richmond, whose shares are quoted on the secondary Unlisted Securities Market. With sales this year likely to top $1 billion it has overtaken PPCS and Affco.

PPCS' first chop at a shareholding was in 1997 when it tried to buy the Meat Board's 33% stake. The genteel farmers of Hawke's Bay objected and the stake went to Maori investment company HKM Nominees.

Not to be denied, PPCS turned up as an indirect holder in February last year when it bought a one-third stake in HKM and declared it wanted a controlling 51% Richmond stake.

The resistance was organised by former director James Aitken and fellow farmers Tom Crosse and John Cullwick. They set up a purpose-built vehicle, Richhold, which offered to swap its shares for Richmond shares to form an anti-PPCS voting block.

Richmond's independent directors were curiously apathetic. Despite outnumbering HKM's directors two to one they rejected the Richhold offer and displayed an apparent unwillingness to pursue Richhold's claims that the PPCS shareholding breached the company's constitutional rules.

Richhold eventually got Richmond chairman Bob Croker and deputy chairman Michael Morris to look into the constitutional angle.

In the meantime the $12 million takeover of Waitotara Meats weakened PPCS' position, diluting its holding to 25%. It promptly began to buy on market, lifting its holding to 36%.

Its strategy came to grief in June when Messrs Croker and Morris reported back.

Their legal advice, they said, was that PPCS had failed to give the notice required by the company's constitution that it was gaining an interest in both the original block of shares and the subsequent on-market buys.

They ruled the shares "defaulter securities" and gave PPCS a month to sell.

And, strangely given PPCS' claim its own legal advice said the opposite, it did. It says the Richmond directors could have taken charge of the share sale process if it hadn't acted. Shoeshine would have thought an injunction to maintain the status quo pending a court hearing could have been gained readily enough if PPCS really had a case to argue.

Hence the suspicion among some in Hawke's Bay is that it hasn't really given up at all. HBM, they say, could be simply warehousing the shares for PPCS until it can give the required notices and buy them back. Weren't the shares paid for with PPCS vendor finance?

The thought also occurred to Richmond's independent directors.

So suspicious were they, Shoeshine hears, that they required HBM to supply a written assurance there were no agreements or understandings between itself and PPCS regarding the Richmond shares.

PPCS says it is now assessing its options. One of these is to go to court to challenge Richmond's interpretation of the rules.

That seems unlikely. It can't get the shares back so the only remedy available would be damages.

And even if it won those damages are unlikely to amount to much. It sold the shares for $29 million, far more than it paid for them.

Then again, it can afford to be patient. Richmond is heading for a Stock Exchange listing, and at that point the game is on again.

HBM may have said it had no agreement with PPCS but that doesn't mean it can never sell the shares back.

And if there's one thing Paul Collins has, hopefully, learned from his Brierley Investments years it's this. Never buy unless you have an exit strategy.

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