PGW - PGG Wrightson

[Snoopy]

The Agria website lists the non compliance share price noted notice dated 19th July 2012. So by my reckoning 19th January is the deadline. And that means getting the share price up to $1 and more by 19th December if the shareprice is to average $1 for a month before the threatened delisting date.

After reading through the Agria 2012 annual result I need to issue another correction. The non-compliance notice sent to Agria by the NYSE was informed to the market on 19th July. But it was issued to the company on 27th June 2012. That means D-day for compliance is actually 27th December 2012. The all important month before date for determining the monthly average share price is 27th November 2012. The timetable is looking very tight here.

SNOOPY

[Snoopy]

2 Million loss is almost nothing. I thought you may be impressed, by that number. You told me that the falling shareprice of PGW would be
a big problem for AGRIA.

Yes I did say that the falling PGW share price would be a big problem for Agria. I may have to admit now to being wrong. But I think Agria have been 'saved'(?) by the accounting standards, so please hear me out....

The 2011 accounts showed Agria "marking to market" their PGW holding. But it transpires that this "marking to market" only applied when PGW was classed as an investment for Agria. That was only for two months of the FY2011 financial year. Once the Agria shareholding moved above 50% PGW became a subsidiary and was consolidated into the Agria accounts. At that point the PGW share price was effectively frozen on the Agria accounts at the acquisition price of NZ60c/US46c.

Thus when Agria stated on page 53 of the FY2012 annual result filing that.

"We had no unrealized gain or loss on investments in the year ended June 30, 2012,"

that is only because accounting standards did not require them to declare it. The market value of the 50% of PGW that Agria owns is approximately $US165m (based on $NZ1=US80c, PGW sp= 35c, 754m shares on issue). With the share price for PGW now at US28c, Agria is sitting on a staggering paper loss of just over $US100m.

If Agria had to sell down their PGW holding even from 50.22% to 49.9% this loss would be have to be brought onto the books. IMO that would be the end of Agria.

I am sure Agrias bankers are not silly and realize the precarious nature of their investment. There is an old saying that if you owe the bank $US1m that is your problem but if you owe $US100m then it becomes the banks problem. Alan Lai is wealthy but he is not that wealthy. It would not be in the interest of Agrias bankers to force them out of business. But IMO Agria is dead already, despite what the accounts are telling you.

SNOOPY

[Snoopy]

Agria stated on page 53 of the FY2012 annual result filing that.

"We had no unrealized gain or loss on investments in the year ended June 30, 2012,"

A little more information on this subject. The value of PGW, even as an investment, can be reduced on the Agria books if it fails an annual goodwill test.


Quoting from p58 of Agrias annual result 20F filing.

-----

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired. In April 2011, the Company acquired a controlling interest in PGW, resulting in additional goodwill. In accordance with the provisions of ASC 350-20, “Intangibles - goodwill and other”, goodwill amounts are not amortized, but rather are tested for impairment at least annually, or more frequently if there are indicators of impairment present. If the carrying value of the reporting unit to which goodwill is allocated is less than the reporting unit's fair value, goodwill is considered to be impaired. A reporting unit's fair value is determined based on its expected cash flows. The amount of goodwill impairment loss is measured as the excess of the carrying value of goodwill over its implied fair value. Subsequent reversal of goodwill impairment loss is prohibited. Goodwill has been assigned to Beijing NKY Seeding Development Co., Ltd., a component of the Company's corn seeds operating segment, Beiao, a component of the Company's vegetable seeds operating segment, and PGW, a company engaged in rural services in New Zealand, for purposes of impairment testing. No impairment charges have been recognized for the years ended December 31, 2009 and 2010, the six months ended June 30, 2011, and the year ended June 30, 2012.

-----

So far so good. But what Agria didn't tell their shareholders is that on page 92 of the PGGW report for FY2012, the goodwill value of PGW has been tagged by the auditors in New Zealand! This makes the net asset position of Agria very precarious indeed, even if Agria have carefully not told their minority shareholders the full story!

SNOOPY

[Snoopy]

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2011 Balance sheet:

PGW Total Liabilities: $NZ844.685m
PGW Total Equity: $NZ604.341m
PGW Total L & E: $1,449.026m

Convert that to USD using $NZ1= US81.73c

PGW Total Liabilities: $US690.36m
PGW Total Equity: $US493.92m
PGW Total L & E: $US1,184.29m

Reduce value to allow for Agria owning 50.22% of shares as at 30th June 2011

Agria PGW Liabilities: $US346.69m
Agria PGW Equity: $US248.05m
Agria PGW L & E: $US594.75m

Now we go to the Agria Balance Sheet for the same 30th June 2011 date, which includes the 50.22% share of PGW as a consolidated entity.

Agria Liabilities: $US831.1m
Agria Equity: $US412.3m
Agria L & E: $US1243.4m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US484.4m
Underlying Agria Equity: $US164.2m
Underlying Agria L & E: $US648.6m

That means the underlying Agria itself has an equity ratio of:

$US164.2m /$US648.6m= 25.3%

Repeating this exercise for the FY2012 financial year...

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2012 Balance sheet:

PGW Total Liabilities: $NZ402.698m
PGW Total Equity: $NZ577.774m
PGW Total L & E: $NZ980.472m

Convert that to USD using $NZ1= US79.64c

PGW Total Liabilities: $US320.708m
PGW Total Equity: $US460.139m
PGW Total L & E: $US780.847m

Reduce value to allow for Agria owning 50.22% of shares as at 30th June 2012

Agria PGW Liabilities: $US161.060m
Agria PGW Equity: $US231.082m
Agria PGW L & E: $US392.141m

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 50.22% share of PGW as a consolidated entity.

Agria Liabilities: $US415.033m
Agria Equity: $US406.596m
Agria L & E: $US821.629m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US253.973m
Underlying Agria Equity: $US175.514m
Underlying Agria L & E: $US429.488m

That means the underlying Agria itself has an equity ratio of:

$US175.514m /$US429.488m= 40.8%

That is heavily indebted but manageable (perhaps), until you remember the $US100m in PGW share writedowns that have been shuffled off balance sheet

($US175.514m-$US100m) /$US429.488m= 17.6%

With no income to service a $US430m debt and an equity ratio of just 18% it is at this point that I declare Agria technically bankrupt.

SNOOPY

[Under Surveillance]

With no income to service a $US430m debt and an equity ratio of just 18% it is at this point that I declare Agria technically bankrupt.

SNOOPY

You certainly make a strong case.

On the other hand, I see from the 20-F filing that Agria Corporation says:
Debt owed by oursubsidiary, Agria Asia Investments :· acquisition debt denominated inNew Zealand dollars of NZ$25.0 million ($19.7 million) that matures on October31, 2012 provided by a bank. In September 2012, we received a credit approvedterm sheet from the bank to extend this loan to February 27, 2014.;
· acquisition debt denominated inNew Zealand dollars of NZ$10.0 million ($7.9 million) that matures on October31, 2012 provided by Livestock Improvement Company. If the bank which providedthe acquisition debt referred to above extends the NZ$25.0 million acquisitiondebt facility, Livestock Improvement Company is restricted in its ability to enforce security in the event of them not being repaid on October 31, 2012.

On the face of things a NZ bank is prepared to roll over its $25 million loan for 16 months, and hook in LIC to another $10 million roll over, to a financially shaky/technically bankrupt oufit. The term sheet might purposefully have conditions that can't be met, of course, or there might be guarantees or whatever offering comfort. Otherwise the bank is asleep.

[Under Surveillance]

If Agria has any hope now it will come from Ngai Tahu, not New Hope IMO.

SNOOPY

You could well be right, in the face of the posts here banging on about New Hope intending to do this or that, and offering up little but riddles to support the assertions.

New Hope's shareholding in Agria Asia is just 1.65 times larger that Ngai Tahu's, 11.95% versus 7.24%. Possibly more importantly, according to the 20-F filing, Agria Corp has entered into shareholder agreements with both New Hope and Ngai Tahu which contain provisions protecting the rights of New Hope and Ngai Tahu, including those that would require the unanimous shareholder approval for certain decisions.

Depending on the detail of those agreements Ngai Tahu could roar just as loudly as the larger mouse.

On the STU thread, I think it was, you (Snoopy) postulated a deeply discounted (29c nominated) dispersal of Agria's 50.22% holding in PGW. It might be fanciful, but what chance New Hope and Ngai Tahu will end up having first dibs on any dispersal? The ratio might not be 11.95:7.24, but whatever it were, China Inc would end up with less than 50% and Ngai Tahu with a stake sufficient to block a full takeover down the line. And China Inc would have to seek OIC approval to go back above 50%, in hopefully less desperate times than in the last instance.

[percy]

As we have seen with HNZ and STU recently it is the fundamentals of the company,rather than the strength/weakness of the major shareholder that we should be most concerned with.George Gould is doing an excellent job,the results of which will work through.

[Balance]

You could well be right, in the face of the posts here banging on about New Hope intending to do this or that, and offering up little but riddles to support the assertions.

New Hope's shareholding in Agria Asia is just 1.65 times larger that Ngai Tahu's, 11.95% versus 7.24%. Possibly more importantly, according to the 20-F filing, Agria Corp has entered into shareholder agreements with both New Hope and Ngai Tahu which contain provisions protecting the rights of New Hope and Ngai Tahu, including those that would require the unanimous shareholder approval for certain decisions.

Depending on the detail of those agreements Ngai Tahu could roar just as loudly as the larger mouse.

On the STU thread, I think it was, you (Snoopy) postulated a deeply discounted (29c nominated) dispersal of Agria's 50.22% holding in PGW. It might be fanciful, but what chance New Hope and Ngai Tahu will end up having first dibs on any dispersal? The ratio might not be 11.95:7.24, but whatever it were, China Inc would end up with less than 50% and Ngai Tahu with a stake sufficient to block a full takeover down the line. And China Inc would have to seek OIC approval to go back above 50%, in hopefully less desperate times than in the last instance.

Snoopy could well be right - this is the golden opportunity (or in the case of the Maoris, treaty opportunity) for Ngai Tahu to become the major rural servicing player in NZ. Would they not love that!

[upside_umop]

Repeating this exercise for the FY2012 financial year...

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2012 Balance sheet:

PGW Total Liabilities: $NZ402.698m
PGW Total Equity: $NZ577.774m
PGW Total L & E: $NZ980.472m

Convert that to USD using $NZ1= US79.64c

PGW Total Liabilities: $US320.708m
PGW Total Equity: $US460.139m
PGW Total L & E: $US780.847m

Reduce value to allow for Agria owning 50.22% of shares as at 30th June 2012

Agria PGW Liabilities: $US161.060m
Agria PGW Equity: $US231.082m
Agria PGW L & E: $US392.141m

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 50.22% share of PGW as a consolidated entity.

Agria Liabilities: $US415.033m
Agria Equity: $US406.596m
Agria L & E: $US821.629m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US253.973m
Underlying Agria Equity: $US175.514m
Underlying Agria L & E: $US429.488m

That means the underlying Agria itself has an equity ratio of:

$US175.514m /$US429.488m= 40.8%

That is heavily indebted but manageable (perhaps), until you remember the $US100m in PGW share writedowns that have been shuffled off balance sheet

($US175.514m-$US100m) /$US429.488m= 17.6%

With no income to service a $US430m debt and an equity ratio of just 18% it is at this point that I declare Agria technically bankrupt.

SNOOPY

Hi Snoopy,

Interesting you're looking at this too - I have before looked at this but maybe in not quite as much depth.

First thing...Agria has one ugly set of accounts don't they? They do disclose a bit however...

I'm not completely familiar with US GAAP (actually, not at all) but I do know it is a long standing goal between the IASB and FASB to converge the standards and they have been doing a bit of work over the years to do so. Therefore, can probably look at them "side by side" without too much problems. There may be some differences when you do some in depth analysis.

Looking at Agria's accounts, it appears they consolidate all of PGW's numbers. Per note 4: "The results of PGG Wrightson's Limited have been included in the consolidated financial statements since acquisition date.."

A quick check:

Total revenue recognised by Agria = $1,089,061 x 0.99* / 0.80** = $1,347,713. Per PGG Wrightsons Group accounts = $1,336,813. Difference is negligible, so yep, looks like they consolidate everything in.
*Per segment reporting note 22 / note 1 - "International" (or PGW) accounts for 99% of disclosed income.
** Average exchange rate over period.

They then disclose the "non-controlling interest" on their balance sheet and income statement, which effectively takes out the portion that's not attributable to them through their 50.22% holding.

So, in summary, I think if you were to subtract PGW's numbers directly off Agria's, you would get the underlying position of Agria. Be aware though, there are differences between US GAAP and NZ IFRS and certain assets may be directly comparable...I think you'll find Agria will have less equity, a higher debt ratio than previously thought and in desperate need of some dividends from PGW.

[Snoopy]

So, in summary, I think if you were to subtract PGW's numbers directly off Agria's, you would get the underlying position of Agria. Be aware though, there are differences between US GAAP and NZ IFRS and certain assets may be directly comparable...I think you'll find Agria will have less equity, a higher debt ratio than previously thought and in desperate need of some dividends from PGW.

upside_umop, thanks for rewminding us that US GAAP and NZ IFRS are not necessarily interchangable.

Snoopy previously wrote:
"Now use subtraction to look at the underlying Agria balance sheet."

I may not have been clear when I wrote the above, but basically I got hold of both the "Agria balance sheet" and the "PGW balance sheet" and did exactly the subtraction exercise you suggested. Of course I had to convert the PGW figures into US dollars so that I was treating all of the figures in one currency. I have left my figures on the forum just in case anyone wants to show me that I have done it incorrectly. But in lieu of any corrections, I stick with my original conclusion.

Agria Equity Ratio = ($US175.514m-$US100m) /$US429.488m= 17.6%

With no income to service a $US430m debt and an equity ratio of just 18% it is at this point that I declare Agria technically bankrupt.

SNOOPY