Forty-Six White Ants and Mushrooms 1993

CHAPTER FORTY-SIX

White Ants and Mushrooms

Unrest and frustration within a section of the board of directors had been simmering for a number of years due to their diminished role in the administration of the company since their election in 1987. Although it was accepted that the Scheme precluded their involvement, there were continuing issues relating to lack of communication. With victory in sight, the pace had quickened to end the Scheme of Arrangement as quickly as possible. To facilitate this, the company was required to repay all outstanding debt to unsecured creditors. The proposal was to introduce a cornerstone shareholder to provide the necessary funds, which would provide existing shareholders the opportunity to take up 671,000 $1 shares at an issue price of $1.15 on the basis of one new share for every seven shares now held and secondly to approve the issue of 2,828,000 new shares to South Port New Zealand Ltd at an issue price of $1.20 per share.

South Port New Zealand Ltd operated the port of Bluff and had a majority shareholding in both Southland Farmers’ Co-operative Association Limited and Invercargill Wool Dumpers, two agriculturally based companies not unlike Farmers’ Co-op. It happened that Bancorp Merchant Banker, Auckland were communicating with South Port, who like many others at the time had been experiencing difficulties in connection with their subsidiary Southland Farmers and suggested they might like to join with the revitalised Farmers’ Co-op in Taranaki, using the synergies to enhance both companies. The Scheme managers had been looking for a suitable partner for over two years and this particular arrangement appeared to fulfil the criteria.

Various other alternative avenues had been explored by the Scheme managers, including Farmers’ Co-op shareholders supplying capital, which was dumped when only 50 per cent of current shareholders elected to convert their 1987 Preference Capital to Ordinary Shares earlier in the year. Past experience had shown that capital had always been difficult to raise within shareholder ranks. The proposal had been placed before the Committee of Creditors and Members and had received unanimous support and now the final requirement was an endorsement by FCOS directors that would allow the creditors and members to vote on the proposal at a Special General Meeting on 23 June 1993. The background and details were fully explained by Doug Hazard at a meeting of directors at Farmers Co-op’s boardroom on 20 May 1993, accompanied by relevant reports and meeting notices for the board’s consideration. Doug Hazard also outlined other possibilities that had been explored. Kiwi Co-operative Dairies had been approached on numerous occasions but ‘they were arrogantly not interested’ and New Zealand Co-op Dairies had been approached, ‘but were interested only in a takeover to promote dairy company politics’. Williams & Kettle were also ‘quietly canvassed’, but had ‘their own listed float on the burner’, and ‘were aggressively expanding and would only be interested in a takeover’. Others canvassed were Sir Ron Brierley and Pyne Gould Corporation, who, ‘while courteous, declined an equity stake but offered to buy the finance company’.

South Port’s involvement with Farmers’ Co-op did not initially receive universal approval, with factions in the deep South and Taranaki questioning the wisdom of this alliance. Questions were raised by some councillors of the Southland Regional Council and had sparked heated local public debate that insufficient information to fully evaluate the state of FCOS and its finances had left them with no option but to oppose the proposal. In Taranaki the news of the deal with South Port was received by Farmers’ Co-op director Don Harvey from Pungarehu with dismay and he immediately went on the offensive with a statement to the press indicating that he opposed the proposed sale to South Port New Zealand Limited, doubting whether current shareholders would retain control of Taranaki’s independent stock and station company.

Two other directors, Waverley’s Paul Pedersen and Manutahi’s Joe Laird, also opposed the sale. Mr Harvey, with Mr Pedersen and Mr Laird, were three of the seven shareholders who had initially fought to prevent Farmers’ Co-op being sold to Elders in 1987. Don Harvey was concerned that if Farmers’ Co-op’s profits went outside the region the ‘customers would not be so loyal and the company would suffer’. He also said that: Loyalty had been the success of this company to date. Shareholders and Taranaki Farmers customers have been asked, why should they continue with their loyalty in trading when a large proportion of the profits will be going to South Port. … South Port would have control of the company and could unseat a director who did not comply with its thinking. Messrs Harvey, Pedersen and Laird, supported by another shareholder Ross Richardson, led the charge to lodge an alternative proposal with the board to circumvent the South Port proposal in an attempt to retain the shareholding within Taranaki and stop outside interests obtaining a 34 per cent interest in the company. The initiative was floated by an existing Farmers’ Co-op shareholder Kalimantan Estates Ltd who was prepared to underwrite ‘a one-for-one cash issue to shareholders at $1 a share’, with Kalimantan Estates taking any shares that were not taken up. With editorials and advertisements relating to the two offers the debate between the two parties intensified and the rift widened when a public statement was made by a director supporting the alternative proposal without the permission of the chairman of directors, which breached company policy. South Port New Zealand Ltd managing director Neil Cantrick, Invercargill, came to the aid of Farmers’ Co-op to alleviate the concerns of some Taranaki shareholders by publicly stating that: South Port already has an interest in the stock and station industry through Southland Farmers’ Cooperative Association, which is operated on an arm’s-length basis. … South Port is well aware of the need to retain farmer loyalty and to service the client base and would be loath to alienate those directly involved, including the staff. Director Peter Cook supported the proposal, as he felt it would strengthen the company and its share value, saying: ‘South Port is seen as a ‘White Knight’, having invested in this type of operation already.’

Messrs Lithgow and Harris also supported the proposal, with Mr Harris showing some sympathy with the concerns of Messrs Harvey, Pedersen and Laird. Part of the restructuring included bringing the present number of nine directors down to six, to make way for three directors to be nominated by South Port New Zealand Ltd. It was claimed that, ‘it is a campaign to oust the three directors who opposed the proposal’, and that directors who objected to the South Port proposal were being given the ‘mushroom treatment’ and counter claims that the three dissenting directors were trying to ‘white ant’ the entry of South Port by bringing in an alternative scheme to suit their own ends. It became an acrimonious dispute.

Meetings with South Port in Invercargill and a due diligence exercise over a period of four days in Hawera culminated with South Port New Zealand Ltd making an offer. It was felt that for growth, and faced with paying tax and dividends in the future, $4 million was required and that a premium

should be payable by a new partner. Messrs Hazard and Train went to Invercargill to negotiate the deal on the basis that shares to Farmers’ Co-op’s own shareholders would be offered at $1 and South Port at a 20-cent premium. One South Port director objected to paying a premium and said that they would pay only a 19-cent premium. Doug Hazard objected to this last-minute alteration to the agreement and said ‘No, come on Brian, we are going home’. South Port eventually agreed to pay the 20-cent premium on the condition that Farmers’ Co-op paid them 1 cent per share administration fee. An account for the fee, was never received from South Port.

Despite all the lengthy rhetoric and forthright argument it was conceded that if the Extraordinary Meeting on 23 June 1993 rejected the alternative Kalimatan counter offer that would be the end of the matter. On the day more than 600 people attended the six-hour meeting in the Hawera Community Centre to discuss the South Port proposal. Chairman Brian Train explained that, The share purchase by South Port would see a cash injection of $4 million into Taranaki Farmers, allowing $2 million to be repaid to ‘frozen’ creditors. He reiterated that Taranaki Farmers would have a much stronger base and that the company was very comfortable with the arrangement. South Port had indicated that they did not intend to increase their shareholding and the control of Taranaki Farmers remained with the shareholders. The Hawera Star reported: The poll to accept South Port’s offer was carried by a substantial majority, with 2,623 voting in favour of the proposal, 871 against, and 78 informal or invalid votes. About 1,500 proxy votes were received, 1,107 of which favoured the share deal. Approval was given for an issue of 2,828,000 new shares to South Port at an issue price of $1.20 a share.

An amazing journey came to an end on 30 July 1993 following six arduous but highly successful years to the day under the umbrella of the Scheme of Arrangement. The inimitable Doug Hazard, with his associate Scheme managers David Simpson and Brian Train, and a determined hard core group of executives, managers, loyal staff and shareholders had completed the ‘mission impossible’

Directors and management of Farmers’ Co-op, 1993. Back row from left: Ian Guise, Barry Whelan (general manager), Peter Cook, Neil Cantrick, Roy Lithgow, Trevor Harrop (company secretary). Front row from left: Doug Hazard, Brian Train (chairman), Paul Harris (deputy chairman). Absent: G. W. Rogers, G. C. Turner.

of restructuring the company, repaying all creditors in full and achieving financial stability and an outlook of prosperity. With success came a certain amount of sorrow with the dissolution of a highly focused and dedicated team, many friendships were formed and some lost as the curtain closed on a remarkable period in the company’s history. The triumvirate of scheme managers, although very different personalities, were in fact perfectly matched for the job and were now returning Taranaki’s rural trading jewel, so cleverly and carefully nurtured back to health, to a board of directors which would introduce a new era to the revitalised company. The turnaround under the Scheme of Arrangement ‘appeared to be the most successful ever achieved in New Zealand’, with the loss/profit after the Special Preference Dividend results during the six years from 1987 clearly showing this: 1987 $4,815,000 loss 1988 $1,454,000 loss 1989 919,000 profit 1990 $1,227,000 profit 1991 838,000 profit 1992 $2,312,000 profit 1993 $2,667,000 profit (11 months)

David Simpson’s formal association with Farmers’ Co-op now ended, although the memories and feeling of satisfaction would doubtless remain with him for the rest of his life. This had been one of the most remarkable recoveries in New Zealand’s commercial and corporate history and he had significantly contributed to its highly satisfactory conclusion. With the exception of Brian Train who held the position of chairman, shareholders were requested to elect five directors from the eight incumbent board members available at the October 1993 Annual General Meeting. Those duly elected were Messrs Peter Cook, Paul Harris, Roy Lithgow, George Rogers and George Turner. In addition, part of the equity investment requirement was for South Port New Zealand Ltd to have a representation of three members on the board of directors and those appointed were: Neil Cantrick, managing director of South Port; Ian Guise a director of South Port and Doug Hazard, who had headed the former Scheme of Arrangement. For the first time ever the board had a significant influence from outside the province. Three of the original seven directors who accepted nomination in 1987 to provide the continuity and impetus to facilitate the revival of the company, namely Don Harvey, Joe Laird and Paul Pedersen failed to survive the reorganisation within the directorate. Their courage in accepting nomination to the board in 1987 and initiative and service to the board during the Scheme of Arrangement had been a major contributing factor to the company’s recovery over the past six years.

While the wheels of restructuring were turning in the boardroom, confidence in the dairy sector and investment in sheep and cattle properties had positively affected all divisions of the company, with increased turnover contributing significantly to growth. With a focus on service through the Rural Farm Supply Centres, substantial upgrading of branch store facilities was commenced. Redesign, refurbishment and improved layouts were completed at New Plymouth, Opunake and Kaponga, and following the recent closure of the grocery department at Inglewood, major building construction was underway to provide a modern Farm Supply Centre for the district.

Confidence was growing and the board, shareholders and staff were getting used to the almostforgotten feeling of success. February 1994 saw the closing down of the FCOS Hawera retail store, one of South Taranaki’s iconic retailing outlets, and the introduction of another national retail operation when the premises were leased to the Warehouse for the establishment of Hawera’s first ‘Red Shed’. The farm merchandise premises, on the east side of Princes Street, purchased from New Zealand Loan and Mercantile Agency Company in November 1942, was now Hawera’s only Farmers’ Co-op retail outlet. On 24 June 1994 another record net operating profit was announced of $3,138,000, with a dividend of 6.5 per cent per share, the first paid for almost a decade.

An Extraordinary General Meeting of June 1993 provided for the board to be reduced in number at the 1994 annual general meeting from nine to six, culminating in the resignation of Messrs D. L. Hazard, R. A. Lithgow and G. C. Turner to comply with the Articles of Association. Two of the three retiring directors had made significant personal sacrifices and contributions to the revival of the company during the past seven years. Roy Lithgow, a former employee and now chartered accountant was one of seven directors who had the vision and courage in 1987 to offer his services to help return the company to profitability. Doug Hazard, Scheme manager for six years and director for one year, was without doubt the brains trust who, with David Simpson, spearheaded the company’s restructure and successful recovery.

With the ‘dark hours’ behind them, Brian Train and his board could start thinking about moving forward again and they now considered an opportunity to expand into the King Country. In November 1993 the company purchased a 51 per cent shareholding in Te Kuiti Meat Processors Limited. Doug Hazard’s connections with the meat industry and Brian Train’s excursion into exporting when he supplied mutton to Russia and later exported lamb to the United Kingdom until the early 1980s provided the enthusiasm and impetus to contemplate the initiative. The plant had a licence to kill mutton and lamb to export to major overseas markets, with a capacity of 2,300 head per day. It appeared at the time ‘to be the only processing meat company in New Zealand without any borrowings’, and had withstood the difficulties of over capacity within the meat industry. It was an entrepreneurial and inspired decision which could, if it was successful, provide a good opportunity for vertical integration within the company and place it in a position of creating a ‘plate-to-pasture’ synergy that was a little before its time.

However, within six years only one dividend had been paid to the company from the Te Kuiti operation. The company had been operating as a joint venture with a marketing company who were on a fixed commission that left little, if anything, for shareholders. Consequently, at the suggestion of Brian Train, a decision was made to kill and process bobby calves and export them on the company’s own account. One of New Zealand’s largest and oldest meat processors, Weddel Group collapsed in 1994, with suppliers of stock being caught by surprise. This precipitated the formation of a consortium comprising the majority of the North Island meat processors, who purchased the company’s assets and formed a company called Trial Run Holdings. In 1998 the meat industry was struggling to survive and the bank requested that Te Kuiti Meat Processors have their funding of $1,000,000 guaranteed by the company, the major shareholder. This would have required an Extraordinary General Meeting and the consent of the shareholders. To keep the ownership with the two shareholders Brian Train went in to bat on his own account and raised $1,000,000 against his own land, lending it to Te Kuiti Meat Processors for three years.

Throughout the ensuing years this volatile industry experienced mixed fortunes and in 2001 the annual general meeting ‘Operations Review’ reported on a less-than-satisfactory result from Te Kuiti Meat Processors:

It is disappointing to report that Te Kuiti Meat Processors has not made a satisfactory contribution to the Group. Market returns have not been exploited to their full potential notwithstanding that management have been successful in creating a new and successful outlet in the USA without the assistance of the Company Marketing Agent. Your directors are currently addressing solutions that can be implemented.

With profitability not matching the board’s expectations in December 2001 and the marketing agreement coming up for renewal, a decision was made to sell the company’s 51 per cent stake in Te Kuiti Meat Processors. Following discussions, however, it was resolved that the company would retain the right to kill and export bobby calves. The shareholding was sold in 2002 and the loan to Brian Train repaid. The company maintained its ability to ‘toll process’ bobby calves, which returned

Te Kuiti Meat Processors Limited 1993–2002. Mutton, lamb and toll processing and marketing of bobby calves at Te Kuiti.

over 50 per cent on the original investment. With hindsight, the wisdom of entering into the meat industry at a time when many were struggling to survive may have been questionable, but the bobbycalf operation continued to be a highly successful adjunct to the original intention and has made a significant contribution to the stock and station division and the company’s profitablility. The company now had a permanent presence in the King Country and this venture is one of its success stories.

Farmers’ Co-op had owned property in Taumaranui during the foray into the eastern back country in 1963 when branches were opened at Matiere and Ohura. It had considered establishing a branch office in the town, but the looming recession had stifled plans and the building on the main street was sold in 1980. With the company now performing well and looking to expand operations, the prospect of obtaining a share of the King Country stock and station business was enticing. Fagan Farmers Ltd agreed to sell three farm supply centres, at Taumaranui, Te Kuiti and Pio Pio. Two Fagan families, John and Cheryl and David and Wendy, well known throughout the world as champion shearers, had established these rural merchandise outlets when Elders Pastoral exited the districts in 1988. The arrangement, ‘walk in walk out’ and the purchase of these going concerns provided an excellent opportunity to protect the company’s northern and eastern boundary, alongside the acquisition of a joint livestock operation with Hiscox Livestock King Country, and entry into the Taumaranui saleyards. Alan Hiscox’s achievements in the stock and station industry were exceptional. He had begun his career with NMA Co. of New Zealand Ltd in 1972 and, following a series of mergers, resigned

from Wrightson’s in 1987 to operate as an independent agent. Following an approach from Brian Train to buy his livestock business outright, it was determined that a 50/50 joint venture would benefit both parties. This provided Allied Farmers Ltd with an instant profile and a clientele and Alan Hiscox with the opportunity to gain access to saleyards and infrastructure of large successful stock and station company and a large share of the business in the Taumaranui district. The King Country operation was one of the highlights of 1995/96, and in a year of declining wool production, the welcome increase in baleage signalled good prospects for the future.

The company was now in fine fettle in 1995 when general manager Barry Whelan came to the end of his three-year contract. Throughout his term, at the request of the board, he had been searching for a suitable successor, but finding highly qualified executives willing to bring their families to live in the small rural town of Hawera had always been a stumbling block and despite casting the net wide, interest was fairly muted. The appointment of his replacement became an issue amongst a number of the senior staff; some, who possibly had their sights set on applying for the position, were unhappy with the selection process, paticularly when it was revealed that the method used was outside the company’s own Corporate Plan. A letter was sent to the directors expressing their views and disappointment. The company Corporate Plan stated that:

it is the company objective to provide career opportunities for all employees to ensure that they had the opportunity to achieve full potential. … By selecting an outsider in preference to the company’s existing experienced, trained, loyal, qualified staff, directors have closed this career path opportunity.

Under the Corporate Plan all vacancies were to be advertised internally. This was not done and therefore existing executives did not have the opportunity to express their interest in applying. Objection was also raised to the secrecy surrounding the method of appointment, which some employees had read of in the newspaper before being informed by the company. But it was too late for protestations, as Barry Whelan’s successor, Mr Peter J. Burt had been appointed general manager late in February 1995. With 29 years experience in the stock and station industry, he joined the group at a time when, despite falling livestock prices and a drop in the provincial dairy payout reflecting a fall of discretionary merchandising purchases, the company was in its fourth consecutive record operating profit, of $3,154.000 for the year ended 30 June 1995.

The company’s collapse eight years earlier in 1987 had been accelerated by ambitions to expand into neighbouring provinces. However, the lesson had been learned that tapping into an existing operation is often the key to success, and expansion of the livestock division into the Waikato at a time when others were exiting offered an opportunity that needed careful consideration. Elders Pastoral was in the process of divesting themselves of their King Country, Waikato and Bay of Plenty livestock operations. Colin Morrison, the Farmers’ Co-op’s livestock manager, had expressed his support of the company purchasing the livestock operation in the Waikato, though others felt that the company’s expansion should be to the south. While consideration was being given to the matter, however, Elders Pastoral sold the business to John F. Jones, a dairy-based operation working out of the Waikato. At a meeting in Wanganui between Brian Train and Colin Morrison on the question ‘where to next for the livestock division?’, a discussion on the Wanganui district, Brian happened to ask, ‘What’s going on in the Waikato?’ Colin responded, ‘Well actually you are too late because Elders have just sold to John F. Jones’. According to Colin, Brian said, ‘Well you had better get off your ... and do something about it!’

Peter J. Burt, general manager of Allied Farmers Ltd, 1995–98.

Taumaranui branch store 1996. Allied Farmers Ltd’s first Taumaranui store, trading as King Country Farmers.

Although Elders had sold the livestock operation to John F. Jones, no consultation had been entered into with the incumbent livestock agents, and with no contracts signed, eight agents had their sights set elsewhere. An approach had been made by this core group to Wrightson’s, but that company only wanted to hand-pick three agents, which was unacceptable. They then contacted the New Zealand Dairy Company, who showed some interest but finally decided to stay out of the livestock industry. The group of eight were meeting weekly to discuss various options and opportunities. Colin Morrison said: Allied Farmers, Auckland Province was bought by Yates Corporation and they on sold to Elders. Then Elders then on sold to John F. Jones. I rang one of the people I knew, a livestock agent on the Friday night, … his name was Ric Darwick, and said, I understand that you are going to work for Elders. He said ‘no I am not, Colin. I am not going to work for John F. Jones’. … I said to him, ‘Would you work for Taranaki Farmers.’ He said, ‘Yes – I would’. So I spoke with him again on Saturday morning and Saturday afternoon. Colin Morrison drove to Ric Darwick’s home in the Waikato the following day and met him and the seven other livestock agents who ‘in theory were going to transfer from Elders to Jones’. The outcome was that on the following Wednesday Colin Morrison returned to the Waikato and, at the Te Rapa Tavern, eight livestock agents were hired, with Bill Sweeney appointed as the livestock manager. The icing on the cake was gaining access to the Frankton saleyards. Although the operation would have succeeded without that facility, it could have created difficulties. Bill Sweeney said to Colin Morrison at the outset, ‘if we get into the yards … eventually the Waikato will run 20 agents for Taranaki Farmers’. That was the goal. Fortunately two of their number were auctioneers and with negotiation and the high reputation of the newly recruited livestock personnel, approval of entry by the Frankton Saleyard Committee was finally confirmed, although some competitors fervently opposed their right to use the yards. An approach was then made to an aluminium window company with premises immediately opposite Frankton saleyards to lease space for an office comprising

a branch manager’s office, reception area and a room for the livestock agents, was satisfactorily finalised.

So began what is now a highly successful Waikato Farmers livestock operation that at the time of writing this history employs 20 livestock agents and covers an area from Te Kauwhata to Paeroa, across into the Bay of Plenty, and back through Rotorua to Otorohanga. Entry into the Morrinsville saleyards was gained by purchasing a one-sixth share and more recently the Frankton saleyards were purchased and are jointly owned by Allied Farmers Ltd and PGG Wrightson. By 1998 the company had entry into saleyards in the Waikato, the King Country, Taumaranui, Te Kuiti, Pio Pio, Otorohanga, Morrinsville and the Kauroa saleyards at Te Mata near Raglan.