Wednesday, July 6, 2022

Looking for $10m, hoping for more

Wools of New Zealand will have at least $7.5 million in cash and early annual revenues of about $4m to fund its business plan if its capital raising hopes are realised.

It is targeting at least $10m in a share issue to strong wool producers, but is hoping the figure will be greater than this.  The minimum amount to be raised is $5m in the issue due to close on December 14.

WoolsNZ has a wide range of long term manufacturing and retailer relationships in overseas markets and wants to use its new funds to develop these on to a strong commercial footing over the next few years, protect the brands, help stabilise the industry, avoid the strong wool price volatility of the last two years, but to lift wool prices from current poor levels.

Of the capital raised, about $550,000 will pay the issue costs and $1.87m will repay a loan to the Wools of NZ Trust.

The prospectus says that funds raised above that level will be used to develop supply chain and innovation technologies and establish royalty-earning marketing programmes and new selling strategies.

The capital will be complemented by a Wool Market Development Commitment (WMDC), initially set at 15c/kg of greasy wool produced. Given a $10m capital raise, chairman Mark Shadbolt said this would bring in about $3m a year to WoolsNZ as working capital, with another $1m available from revenues.

The directors believe the WMDC could be in place for up to five years, when the business should be “on our own feet”.

The WMDC replaces a voluntary fee operating under the old Trust structure. Up to 4000 strong wool producers were paying this fee at various times, a group which could be expected to provide a solid basis for the capital raising. As shown in the accompanying panel, those fee-payers will be issued free shares on top of shares they subscribe for.

WoolsNZ will send out 16,000 prospectuses and expects the number of qualifying farmers to be about 10,000.

To raise $10m would require the minimum $5000 subscription from 2000 farmers (producing the average 10,000kg a year). That would cover 17% of the strong wool clip.

If the capital raise brings in significantly more than $10m, that will reduce the level of ongoing WMDC required. A $5m outcome would result in some work being cut back or deferred.

The bar has not be set high, because the directors wanted to get the new company structure started, Shadbolt said.

The directors had learned from the WPC co-operative experience three years ago. It had raised nearly $38m from sheep farmers but could not proceed because the minimum figure was higher.

“Probably the model we’ve got now is what we should have used then, and we would have been up and running today.’’

Shadbolt and Keith Sutton were directors of WPC, and are joined on the WoolsNZ board by Philip Guscott, Craig Hickson, and Jamie Tuuta.

Guscott and Hickson are farmers and also involved in the meat processing industry, and are part of WoolsNZ because they recognise that wool returns are a key component in the survival of a viable sheep farming industry, Shadbolt said.

Tuuta is chief executive of the Maori Trustee, which administers about 100,000ha of land throughout the country, including sheep farms.

WoolsNZ is embarking on a more commercial model but says this does not mean it will be competing with existing players in the industry – the procurers, scourers, brokers, and exporters. Wool provided 2% of the world’s flooring surfaces, and New Zealand just 0.6%, and the competition is synthetics, Shadbolt said.

One focus will be to work with both scouring groups – Wool Services International and Cavalier Wool – to have more wool scoured in NZ, and thus less greasy wool exported to China.

Value can only be added through branded wool being exported, Shadbolt said. The company is working on branded products for the China market.

WoolsNZ is working with three exporters, including the PGG Wrightson subsidiary Bloch & Behrens, which handles its lambs wool contracts, sold into the Blazer upholstery fabric brand in the United Kingdom.

This operating model is regarded as a forerunner for the group, with farmers involved in the contracts over the last three years building up to a price 50c/kg ahead of the market, he said. WoolsNZ wants to lift the ratio of direct contracts for strong wool.

Shadbolt’s estimate of a five-year establishment programme is partly based on the Banks Peninsula Wool Growers Group, which he also leads, and which is now getting the pay-off from several years of working closely with overseas customers.

A requirement of for WoolsNZ shareholders is that they join the group Integrity programme, incorporating management techniques and wool traceability.  The programme already involves 1200 farmers, likely to also be voluntary fee payers, and a base for the share issue.

The integrity programme was not an onerous task for farmers as most would be in some similar programme through their meat company, Shadbolt said. The integrity programme is a prerequisite for WoolsNZ’s Laneve brand.

The business is based on the Wools of New Zealand Trust acquired from Wrightson in October last year, and includes the Centre of Wool Excellence in Ilkley in the United Kingdom, described by Shadbolt in the prospectus as the “jewel in the crown’’.

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