William Rolleston: Foreign investment must add value

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After 14 months, the Government finally turned down the sale of Lochinver Station near Taupo.
After 14 months, the Government finally turned down the sale of Lochinver Station near Taupo.

Flogging off the family silver or just selling to the highest bidder? Dr William Rolleston weighs in on two recent Chinese deals

Foreign ownership has been a hot topic. After 14 long months, the Government finally turned down the sale of Lochinver Station near Taupo to Chinese company Shanghai Pengxin.

Pengxin bought Crafar Farms and also owns a majority shareholding in Synlait Farms -- the largest supplier of milk to Synlait Dairy (also part Chinese owned).

Under New Zealand law, the sale of sensitive land, which includes all rural land larger than fivehectares, is subject to the approval of the Overseas Investment Office (OIO).

The OIO must assess the sale on multiple criteria and approve the sale if the benefits are "visible and identifiable". The two overseeing ministers -- Paula Bennett and Louise Upston -- have the final say and can use their discretion.

After the Crafar Farm sale, challenged in the court by a Kiwi group led by Sir Michael Fay, the Government tightened criteria around farmland sales.

A trigger point of four times the average farm size meant there also needed to be economic benefit to New Zealand.

The court also instructed the "visible and identifiable" benefit must be a benefit over and above what a Kiwi purchaser would do.

Lochinver is a substantial property -- 10 times the trigger level to require "economic benefit". The OIO advised the sale should proceed but the decision was "finely balanced".

The ministers disagreed and turned it down.

Foreign ownership has been keenly discussed by Federated Farmers for some time. On one hand, some consider it a property right to be able to sell to the highest bidder wherever they may be in the world. On the other, some worry that sale of land to foreign interests is akin to selling the family silver.

Federated Farmers welcomes foreign investment but we are cautious of land aggregation (the buying of multiple farms) and of vertical integration (the purchase of farms and the processing facilities). Such vertical integration gives no opportunity for the market, from a Kiwi perspective, to intervene.

As land aggregation to any single entity increases, we consider the benefit test should increase.

Sure Lochinver, it is purported, would have netted $88 million, $20m over and above what a New Zealander was prepared to pay, and this would have been recycled back into the economy, but we must also remember that it is a one-off fee and we have traded away an asset, not created income.

With 35 farms already in their portfolio and Lochinver adding the equivalent of about 40 farms, Federated Farmers would have liked to have seen a significant economic benefit associated with the sale. Perhaps Pengxin could have brought to New Zealand some significant technology or provided other Kiwi producers a pathway to market through collaboration or joint venture.

This brings us to the announcement that Silver Fern Farms (SFF) is planning to go into joint venture with Shanghai Maling -- a Bright Foods subsidiary and the largest meat processor in China.

The joint venture would own the assets and the business which is now Silver Fern Farms, leaving the co-operative as a holding company. The deal with Shanghai Maling provides significant access to the Chinese market. According to public statements, processing will continue in New Zealand.

While it is a 50:50 deal, the Chinese have a casting vote over the hiring and firing of the chief executive and over the joint venture's strategy -- the two most important functions of any board.

Meat industry reform has languished for many years and this deal is a significant move.

Alliance, it seems, has dragged its feet on amalgamation of the two co-operatives, considering itself to have the stronger balance sheet and greater survivability.

However, others questioned its strategic strength with processing plants in a country which is increasingly turning to dairy and little in the way of brand development. Alliance has been left flat-footed by this move and time will tell if it's the co-op's eventual undoing or a chance to attract greater supply.

The SFF deal does not trigger land aggregation nor vertical integration concerns for Federated Farmers.

Like the Lochinver sale, the sale has a one-off aspect but it also promises new opportunities and benefits at a cost.

While SFF is a large player in the meat industry, farmers have the option to supply elsewhere if they are not satisfied with the outcome. This is an important protection.

Supplier shareholders, like me, have a big decision ahead and will need to weigh up the deal very carefully. This is not just about the company, but also the future structure of our industry.

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