White knight unlikely to unseat Olam

30-08-2010 | Hugh Stringleman

New Zealand Farming Systems Uruguay (NZS) shareholders await the appearance of the company's white knight to do battle with Olam International of Singapore. It may be a lost cause.

NZS chairman John Parker says a third alternative for much-needed equity raising is imminent, after Olam last week raised its bid to 70c a share, prompting rival suitor Union Agriculture Group of Uruguay to withdraw.

He has hinted at a capital injection, share placement and subsequent rights issue, and would not rule out that entry price being below Olam's offer, which would pose a dilemma for smaller shareholders. To succeed it would require shareholder approval. Most purchased at $1 and $1.50 and would therefore suffer dilution.

Olam's own exposure to dilution is rather better, having put together its initial 18.5% stake at 41c, the low point of the share price track since launch and listing in 2007.

Understandably, however, it does not think much of Parker's idea, and would not vote yes.

The white knight possibility was first raised last Monday, when NZS released its annual results and a target company statement on Olam's initial offer of 55c.

A competing offer from Union followed at 60c and an increase from Olam to 70c, plus Overseas Investment Office consent for Olam to proceed.

The bid increase followed news of Uruguayan tax benefits, worth 11c to 14c a share, and the offer now falls within the independent appraisal range of 65c to 79c.

Union withdrew on Friday, citing better opportunities for agricultural investments within Uruguay than trumping Olam.

The white knight proposition doesn't look as compelling at 70c as it did at 55c.

Parker's appeal, which might also include sale and lease back of some Uruguay farms, is a "stick with us, we know what we are doing" one.

But on behalf of directors he candidly admitted to many mistakes in the implementation of NZ dairying systems and technology in Uruguay which have lead to the need for US$60 million to complete dairy development.

Olam therefore has a strong position with a realistic chance of achieving 13% more of the uncommitted 63% and confirming the PGG Wrightson 11.5% conditional purchase.

Last week it acquired the ACC stake of 7% and senior executives will be in New Zealand early this week for a planned meeting in Taranaki with a group of dairy farming investors believed to have 10% to 15% of shares.

A smaller shareholder, Paul Cooney of Auckland, thinks an Olam majority shareholding would be good for NZS, as it is a proven, diversified, international operator.

"With Olam at 50% and the company remaining listed, it can only lead to good things," he said.

Cooney thought a further small increase in the offer might be needed for Olam to get to 50%. However, Olam suggested purchase of at least some of each shareholder's shares, to be followed by a renounceable rights issue for the capital needs, offering the chance to reinvest at a potentially lower price.

It is prepared for NZS to remain listed and has undertaken not to make a subsequent offer at a higher price within a year.

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