Joint venture with Chinese over Kidman deal could point to future investment trends

Jon Condon, 10/03/2016

AN AGREEMENT revealed this week which confirms that an Australian funds manager has joined China’s Shanghai Pengxin Group as the likely new owner of S. Kidman & Co could be a portent to future corporate-scale investments in the cattle industry by foreign interests.

While the revised Kidman sale deal is yet to be formally approved by the Foreign Investment Review board and Treasurer, Scott Morrison, if it does go ahead it will now include Australian equity.

S.Kidman & Co_Logo_Sm_RGBThere’s an undercurrent of feeling emerging across the red meat supply chain that such JVs will be the way of the future for foreign investment in the Australian meat and livestock industry, whether it be in cattle production, lotfeeding or processing/export.

Funds manager and agribusiness investor Australian Rural Capital confirmed to the ASX on Tuesday that it is a part of the Shanghai Pengxin group’s offer to buy Kidman, which remains subject to final approval from the Foreign Investment Review Board and Federal Treasurer, Scott Morrison.

If the proposed transaction is completed, ARC will hold a direct ownership stake in Kidman as a partner with a Shanghai Pengxin Group member. ARC’s best known investment is its 10pc stake in Namoi Cotton Co-op’s Capital Units. Executive chairman, James Jackson sits on a number of Australian agribusiness boards, including Elders.

The sheer geographic scale of the Kidman land asset and sensitivity toward an outright takeover by Chinese investors has seen the deal emerge as a major foreign investment test for the Federal government. But the confirmation that Australian equity will now be included – and potentially, significant boardroom input – could help defuse some of the uneasiness that some Australians have obviously felt over the sale.

Beef Central spoke with ARC representatives yesterday to learn more about what’s behind the consortium agreement.

Executive chairman, James Jackson said he could not at this point reveal how large ARC’s stake would be, but he described it as “significant and meaningful.”

At the same time ARC would also have a level of influence at board level he said.

“That does not imply absolute board control, but it is a partnership – we will certainly not be just a minority, passive shareholder, without a voice. We will be involved, and have direct influence over the business. That’s a good thing for Australia, and it’s obviously also a good thing for our investors,” Mr Jackson said.

“The bigger picture is that we will be direct investors in Kidman, and are seeking to create additional value in the company. Kidman will remain an Australian company, with shareholders that are both Australian and Chinese.”

Mr Jackson said far from being some ‘last minute development,’ the JV alignment revealed this week had in fact been in place for a considerable period.

It certainly was not just a reaction to recent FIRB/Treasury issues, he told Beef Central.

“ARC in its own right, started looking at Kidman when the portfolio was offered to the market back in April last year,” Mr Jackson said.

“We got through stage one, but were not included in stage two of the process. At that point we did not know specifically about Shanghai Pengxin’s bid, but we knew there was a Chinese group interested. When they entered stage two, ARC started a dialogue with Pengxin, telling them that if they were looking for an Australian partner, we were interested.”

Mr Jackson said ARC had been working directly on the project with Pengxin for almost six months.

Apparently Shanghai Pengxin had always ‘wanted’ an Australian partner in the deal, but as a listed entity, ARC was reluctant to come forward and identify itself earlier in the process, until it had funding in place.

In a statement issued to the ASX on Monday, ARC said that consistent with its business model, it intended to seek to raise equity funds in the Australian capital markets which would give Australian investors the unique and direct opportunity to invest in Kidman in a fund and/or investment company managed by ARC. The purchase application currently before the FIRB by the Shanghai Pengxin Group includes the ownership and role of ARC in the proposed transaction.

Another significant consideration in the likely ARC investment in Kidman is that it creates a vehicle for investment in the beef supply chain for the Australian superannuation industry. Beef Central understands that investment in the cattle industry in its own right, presents all kinds of governance issues for a super fund, in terms of their mandate. But by investing in a listed vehicle like ARC, which in turn invests in a Kidman or other large entity, it is entirely consistent with super funds’ investment strategy.

Mr Jackson told Beef Central that ARC’s interest in partnering with Pengxin had nothing to do with any political reason – such as ‘softening’ public opinion about the sale – but was approached very much from a practical investment standpoint.

“Frankly we did not see the political issues surrounding the sale as being such a hurdle at the time we first engaged with Pengxin,” he said.

“After meeting with the Pengxin people in Shanghai, and talking about what they wanted to do strategically with the business, it became obvious that there was a good fit with what we felt was an opportunity for ARC. We certainly told them we thought they would be better served with an Australian partner, operating in this marketplace, both in a practical sense, and in a broader community sense.”

In terms of a ‘social license to operate,’ history has clearly shown that foreign owners’ of agricultural assets in Australian can get treated somewhat differently than a business with a local partner, in Beef Central’s opinion.

Mr Jackson agreed that the Kidman project ‘model’ was one that appeared to be gaining support in the agricultural investment space.

“It’s a model that works for the Chinese investor, in bringing them up to speed much more quickly in a cultural sense in Australia. Such a partnership model potentially delivers much more out of the Chinese investment in Australia, through productive management,” he said.

“We think this is a good model, where the Australian assets and jobs are still protected and grown; Australians get to participate through investment; but there is also the appropriate transparency, governance and structures in place whereby it is not operating like a 100pc subsidiary of an offshore company, but operates like an Australian company.”

Seeking beef investment for ‘some time’

Mr Jackson said ARC had been looking to invest in the beef sector for some time, and last year’s decision to offer Kidman had been ‘opportune’ from a timing perspective.

“Very few world-class large-scale operations like this come on the market, at the institutional investment scale, so it certainly emerged at the right time. But in doing our due diligence and inspecting the properties, it further reinforced the view that this was a unique opportunity.”

“When it comes down to doing transactions as an investor, from a capital raising standpoint it makes it much easier when the asset is actually clearly-defined for sale, as Kidman was,” he said.

“It could easily take 10-15 transactions to put a similar portfolio together from scratch, and each one can take a great deal of time and effort.”

Mr Jackson said while ARC currently was ‘quite a small’ company, its model was to raise funds, leading to the creation of an investment vehicle or fund which would probably seek to list on the ASX, holding the lion’s share of ARC’s Kidman stake (assuming the FIRB approval is granted).  That fund was likely to be broadly agriculture related, not just beef.

“But we like the fundamentals of what we see in the beef sector. From an investment standpoint, the businesses and the assets are pretty unique, they offer scale and opportunities to grow.

“The industry itself is still very production focussed, but we think investors like ourselves can add strategic value from a capital standpoint, to further develop productivity, and help develop the marketing and supply chain side.”

“But ARC is not a cattle business operator. We are not going to tell people how to round-up stock. What we do like is that there is a ‘fit’ between our skills, Shanghai Pengxin Group’s skills, and the existing Kidman operational management skills.”

“Our job would be to augment what the current Kidman management is trying to do, at an operational level.”


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