It’s rollover day for Pengxin’s Lochinver funding. Will Government approve the deal?

Pengxin International executive Terry Lee has confirmed the company will seek an extension to its funding lines for the Lochinver farm acquisition. The funding lines were due to expire today. But late yesterday the company had still not received any feedback from the Overseas Investment Office since Pengxin’s application went to Cabinet Ministers Paula Bennett and Louise Upston just before Easter.

The OIO has not spelt out why the application has taken so long to resolve.

A recent report in the China Securities Journal – Dakang Pastoral plans to make a private placement of RMB 1.15 Billion to rebuild two NZ farms – sheds further light on the ownership restructuring of Pengxin’s NZ farm interests which has complicated the proposed acquisition.

After the acquisition and transformation of the Crafar Farms and Lochinver Station milk self-sufficiency will be achieved to get rid of dependence on third-party supply, reduce the effects of milk price fluctuations on operations for the company to build a line from the “farm to table ” and complete a closed loop industrial chain. – Chinese Securities Journal

The key takeouts are:

Dakang Pastoral has announced a non-public offering of 9.06 yuan per share for 126,931,567 shares to raise 1.15 billion yuan after deducting all the costs related to a farm transformation project for the Crafar Farms and Lochinver station. The company said that through the acquisition and renovation of the two farms, it will help the company establish a base barrier to build a vertically integrated industry chain and achieve self-sufficient milk supply.

A wholly-owned subsidiary Shanghai NiuShilan (The Land) will acquire Pengxin 100% stake in Anyuan Dairy subsidiary, The New Zealand Farm Group, which already owns the 16 Crafar dairy farms. At the same time, Anyuan Dairy subsidiary, Pure 100, has signed an agreement to acquire the Lochinver station.

Currently, Dakang has received approval for the acquisition of the Crafar Farms and Lochinvar Station from the National Development and Reform Commission (NDRC) and the Chinese commerce authorities. This is dependent on approval from the NZ Overseas Investment Office.

The Chinese Securities Journal also reports, despite extreme weather in 2013, milk solids yield from the Crafar farms experienced stable growth. Lochinver consists of 10 different parcels of land currently stocked with sheep and beef cattle. After acquisition Dakang wants to transform Lochinver to produce dairy products. Crafar Farms and Lochinver Station are approximately 22,000 hectares in total.

The report notes the New Zealand government and citizens see agriculture as the source of the nation’s wealth so foreign companies must meet stringent regulatory requirements. “Foreign takeovers of New Zealand pastureland is very rare. After the acquisition of these two pastures Pengxin will become the first (Chinese) listed company to have a New Zealand pasture resources establishing a unique competitive advantage. The company’s future will be in New Zealand as a strategic center, through the acquisition of pastures transform and improve the supply of dairy, meet the needs of domestic and international markets, and when the conditions are ripe, to increase New Zealand farm acquisitions.”

The post acquisition play is the most interesting:

“After the acquisition the company is expected to build a vertically integrated industry chain, to achieve self-sufficiency in milk supply. A wholly owned subsidiary of Shanghai Niushilan (TheLand) Company, is mainly engaged in the import of infant milk powder and liquid milk and UHT milk business to meet the desires of the domestic market (China) for dairy products.

Through a rich product mix, the company’s profitability is also expected to increase substantially. The company said that the development trend of premiumisation of dairy products is putting reverse pressure on dairy companies to control the upstream sources of milk, which is a key safeguard of our cost advantage and product quality. After the company transforms the New Zealand pasture, it will control the upstream high-end milk supply. According to the domestic demand, it has introduced marketable dairy products, and product upgrading. In addition, New Zealand pasture fed cows do not require spending money to buy feed, dairy unit costs are lower than Chinese domestic costs, which will drive improvements in the company’s profitability.”

This earlier NZ Herald column sheds further light on the OIO delays: The Chinese bidders for Lochinver station are up against the wire with no signal yet from Cabinet Ministers Paula Bennett and Louise Upston that their application will be approved by the time of a rapidly approaching funding deadline.

Pengxin executive Terry Lee confirmed to the Herald that if the acquisition is not approved by June 30, the company will have to seek a rollover of its facilities and could face a please explain from Chinese authorities.

The sale of Lochinver station to Chinese interests spearheaded by Shanghai Pengxin reignited concerns about farm sales to foreigners during the election campaign. The Overseas Investment Office (OIO) referred its recommendation on the Lochinver proposal – which was made via wholly-owned Pengxin subsidiary Pure 100 Farm – to the two ministers just before Easter. But while the OIO’s recommendation has been in front of Cabinet Ministers for two months – way over the normal consideration time period – they say there is no statutory timeframe in which an application for consent must be decided.

The process has been complicated by a significant rearrangement of Pengxin-related corporate structures which is also underway which will ultimately result in Shenzhen-listed Hunan Dakang Pastoral Farming being the ownership vehicle for all the Chinese company’s New Zealand farming interests.

Shanghai Pengxin – which is the flagship of Chinese billionaire Jiang Zhaobai – was introduced as a strategic
investor into Dakang in 2013, taking up a 55 per cent stake as part of a 5 billion RMB capital raising. While the Lochinver application is under the Pure 100 umbrella, the ultimate aim is for Dakang to acquire it along with other Pengxin assets like the 16 former Crafar farms which were acquired in 2012 and other farms waiting OIO approval.
The upshot of this complicated process is that the OIO must ensure that the other directors and shareholders in Dakang pass a good character test. Because the ownership is set to change to a new foreign owner, the accompanying application must demonstrate the new owner can add more value to the assets than a hypothetical local acquirer.

Stevenson Group chief executive Mark Franklin confirmed to the Herald that the deadline for the completion of the 13,843 ha station sale has had to be extended “a number of times.” Franklin said it was his expectation that a decision would have been made by now. But – like other observers – he noted the OIO had a heavy workload. Franklin reiterated that farming is not core business for Stevenson. The company wanted to complete the sale to free up capital to reinvest in other businesses such as expanding its quarry in Drury and investing in a West Coast coal mine.

The application has been in the government pipeline since July 2014. But the OIO is struggling to keep pace with the level of applications. The OIO is so grossly under-resourced it has become an embarrassment for New Zealand, Chapman Tripp M&A specialist John Strowger recently noted. The 2014 Briefing to the Incoming Minister (Bennett) noted that timing of decisions could have personal implications for various applicants, including funding arrangements.

Pengxin International chief executive Gary Romano strongly promoted the benefits of Chinese investment at a recent business awards ceremony saying they extended beyond the farmgate and into New Zealand. Milk NZ Holdings – which is controlled by Pengxin – was named supreme winner at the 2015 HSBC NZCTA New Zealand China Business Awards replicating its earlier success at the BNZ NZ China Business Awards.
He said Pengxin had a long-term strategy to build a vertically integrated business and the Lochinver acquistion was a part of that.