Singapore food company Olam International believes New Zealand Farming Systems Uruguay (NZS) has suffered in the way that it has gone about introducing local farming techniques to another country, to the point where it will not meet its forecasts for 200
Singapore food company Olam International believes New Zealand Farming Systems Uruguay (NZS) has suffered in the way that it has gone about introducing local farming techniques to another country, to the point where it will not meet its forecasts for 2009-10.
NZS, which specialises in setting up and developing dairy farms in Uruguay, said in May that it expected to report an earnings before interest and tax (EBIT) loss of no more than $US10 million for the 2009-10 year but Vivek Verma, Olam's managing director of coffee and dairy products, said this may prove optimistic.
"I think they are coming to that realisation now, so really in terms of their initial forecast about six months months back, we believe there is no possibility of them achieving that forecast," Mr Verma said in an interview with the National Business Review.
"We believe the forecasts are not tenable but we still believe that the company can be turned around and can be made profitable," he said. "It may never meet the exceptional, extremely ambitious and aggressive plans which the company has put forward ... but it can be a profitable project."
Olam has a 18.45% stake in NZS and will pay 55c a share in its takeover bid after striking at agreement to buy 28.1 million shares from PGG Wrightson. The offer is subject to Olam achieving a minimum 50.1% shareholding in NZS and on approval from the Overseas Investment Office.
Mr Verma said Olam is relaxed about the prospect of owning a simple majority of NZS and that it would be happy to keep NZS as a listed entity.
NZS has said it will require $US60 million in fresh funds to take its projects to completion and Olam agrees.
If it came to to a capital raising, minority shareholders would be tapped for funds on a pro-rata basis.
Consultancy Grant Samuel and Associates has been hired by NZS to prepare an independent advisers report on the takeover proposal.
If its bid is successful, Olam would aim to have management, which is currently undertaken by PGG Wrightson, "internalised" within NZS.
Despite its criticism of NZS, Mr Verma said the concept of a New Zealand company developing dairy farms in another country was sound, but he said NZS had not done enough to alter its practices to suit conditions in Uruguay.
"We have been a little bit disappointed with the way some of the things have gone," Mr Verma said. "We believe that the (NZS) concept is a good one, and one that holds water, but I think there has been a problem in the execution."
NZS spent too much money, too quickly, in acquiring a "land bank" in Uruguay, which left the company short of cash to take the project to completion.
"Uruguay has a different climate and is at a different latitude. There are some very successful dairy farms on those latitudes in different countries, and I think the New Zealand model presents a lot of opportunities on these latitudes, but I think the model has to be tweaked," he said.
Olam research suggested NZS should have adopted a significantly higher level feed supplements for its dairy herd instead of adopting the New Zealand model, which involves very low feed inputs.
Mr Verma also questioned NZS's choice of region in Uruguay. Most of the dairying in Uruguay is in the central region, but a large part of NZS's land bank is in the east, which has traditionally been used for rice farming.
Olam is no stranger to South America. It has large operations in Brazil, Argentina, Colombia, Peru and Honduras.
NZS's share price currently trades at 55c. The stock has traded in a 37c to 55c range over the last 52 weeks.
