Solid third quarter result for Fonterra
Fonterra has announced an improved third quarter performance – with a profit after tax of $1.15 billion, up $119 million on the same period last year.
Silver Fern Farms (SFF) has been experiencing the same challenges Fonterra had before listing on the NZX in November 2012. Whether Fonterra was right to list or not is still a matter of debate; Australia's biggest milk processor Murray-Goulburn followed suit this year. The capital raising was required to fund upgrades at the co-operative factories, to focus more on high-value dairy goods including infant formula, consumer beverages and cheeses.
It is a familiar story.
SFF is not, however, suggesting listing on the share market to gain capital. Having failed to raise the required money from shareholders (less than a quarter of the $100 million sought was achieved) it has secured an investment proposal from Shanghai Maling.
What is on offer is a remarkable validation of New Zealand's farming and processing capabilities. It is recognition of the brand that both NZ and SFF have been creating.
Shanghai Maling has valued the company at $311 million and is proposing to inject $261 million, giving SFF access to 70,000 stores in China. Packaging and processing of the meat is to be completed in NZ.
This acknowledges NZ's reputation as a producer of safe food, in the face of increasing concern about food safety in China. Recent research indicates that over 70% of people in China now regard food safety as a matter of concern, and those very concerned have increased from 12% in 2008 to 32% -- a 20% increase. Despite the higher costs of processing in NZ than in China, Shanghai Maling is focussed on achieving premium prices and knows the value of the SFF NZ origin.
Another remarkable and reassuring factor for shareholders is that the deal is non-exclusive. Shanghai Maling is a business focussed on profits; if markets other than China are prepared to pay more for particular cuts, those markets will be supplied. The TPP agreement means there will be more options for meat companies in future and Shanghai Maling wants to be part of that future.
The investment will remove SFF's debt, releasing $30 million of interest payments a year. In addition, SFF will be in partnership with a company strong in research and innovation; new money will enable this portfolio to be boosted.
The proposal for investment recognises the trajectory SFF established several years ago when it moved to branding, marketing, premium products and adding value by focussing on the consumer.
Interbrand didn't include SFF in the announcement of the 2015 Best Global Brands top 10 (led by Apple, Google, Microsoft, Coca cola and IBM), but in articles explaining what it takes to become a global brand it affirmed what SFF has been doing.
Chief content officer for Interbrand, Paola Norambuena, says that in order to keep pace with today's consumers, brands have to be coherent and efficient, with "ambitious vision that shapes both behaviors and structures".
Josh Feldmath (Interbrand chief executive) and Mike Rocha (Interbrand global director, brand valuation) explained that "in the expansion of brands and businesses, acquisitions and partnerships have long been a mechanism for achieving rapid growth in scale and stretch and—with varying levels of success—creating shareholder value".
SFF and Shanghai Maling have an ambitious vision of what their partnership can achieve: it will open up new markets through 70,000 outlets in China. Furthermore, the deal is complementary. The shareholders have the farms, animals, processing and packaging; Shangahi Maling has the outlets and consumers. The joint venture company shares the profits 50:50, and if farmer shareholders don't like the returns, there are always other companies to supply – which means that the profits must be reasonable for sustainability of the company.
Interbrand suggests that the most successful partnerships involve partners with complementary offerings; this appears to be the case in the current proposal.
Shanghai Maling has recognised SFF's potential and the significant investment on offer could take NZ meat to a new level of recognition. The brand might not challenge Apple and Google, but it does have potential to give NZ another category of recognition in animal protein beyond dairy products -- and the All Blacks.
• Jacqueline Rowarth is professor of agribusiness, The University of Waikato.
