PGW - PGG Wrightson

[Snoopy]

Snoopy, I'm saying you don't need to do this step highlighted above in bold as these are already 100% consolidated into Agria's accounts. Therefore, using your numbers:

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

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 100% 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: $US94.325m
Underlying Agria Equity: - $US53.543m
Underlying Agria L & E: $US40.782m

The above shows basically what Agria has on their books and controls excluding PGW. They look to be in negative equity...when you back out the consolidation.

They have much less debt than you originally propose, but are in a worse equity ratio position than thought. Does this make sense?

U.U. I find when calculating these equity ratios, you need to keep in mind what a ballpark answer might be. Your answer, that Agria excluding PGW has negative equity and negative cashflow makes no sense at all. Forget what I said before about Agria being 'technically bankrupt'. You propose that "net Agria" (Agria without PGW) has negative net assets, negative cashflow and large debts. That is bankrupt by any definition that I know. And yet, incredibly, after studying your post and looking at the accounts you have referenced, I do believe you are correct!

I must say I found the presentation of the Agria balance sheet when filed by them in 20F form like no balance sheet presentation I have seen before. Pretending you own all of PGW and backing out the non-controlling interest right at the end is at best ambiguous and at worst deceptive IMO.

I will say the balance sheet when interpreted your way U.U., with the resultant calculated lower debt of "Agria without PGW", reconciles better with other disclosures in the Agria accounts. Specifically the debts Agria have coming due. The negative equity I find it hard to get my head around. But as I said before U.U., I can find no fault with your reasoning!

I would welcome a third informed opinion on this!

SNOOPY

[upside_umop]

I know what you're saying Snoopy - these accounting standards are relatively complex and hard to understand at times. As I said before, I know NZ IFRS relatively alright but US GAAP not so well at all - all I know is there is a long term goal of convergence.

Under NZ IFRS you account for investments in companies the following way. I'm assuming the same is true for US GAAP under the "control" scenario:

Non-significant influence. IFRS has assumed this is if you own less than 20% voting rights - Simply record at cost or cost then fair value.

Significant influence. IFRS has assumed this is between 20% - 50% voting rights. You account for under the equity method. I.e. Record at cost and recognise the changes of the investors share of net assets and the investors share of profit through the profit and loss. See NZ IAS 28 for this standard

Control. This is greater than 50% voting rights. You consolidate the accounts backing out a minority interest for the amount you don't control. See NZ IAS 27 for this standard.

Now to your next point: Negative equity. To me, it makes sense that they are in negative equity as when you think of the history of Agria they:

1) Made a history of losses and therefore had negative "retained earnings."
2) They purchased their interest in PGW with all their spare change.
3) Raised more debt in the process of gaining control of PGW.

By doing this, they "lost" their assets from their balance sheet but kept the debt on it...combine this with their negative retained earnings, they are in negative equity position as a standalone company excluding PGW consolidated amounts.

That is why it is important for Agria to receive dividends from PGW...If you believe PGW will pay big dividends in the future, then Agria may be a good bet. However, they have nothing else going on ($10m Chinese revenue) and you are effectively supporting two corporate structures which makes the whole thing inefficient.

[Agrarinvestor]

I know what you're saying Snoopy - these accounting standards are relatively complex and hard to understand at times. As I said before, I know NZ IFRS relatively alright but US GAAP not so well at all - all I know is there is a long term goal of convergence.

Under NZ IFRS you account for investments in companies the following way. I'm assuming the same is true for US GAAP under the "control" scenario:

Non-significant influence. IFRS has assumed this is if you own less than 20% voting rights - Simply record at cost or cost then fair value.

Significant influence. IFRS has assumed this is between 20% - 50% voting rights. You account for under the equity method. I.e. Record at cost and recognise the changes of the investors share of net assets and the investors share of profit through the profit and loss. See NZ IAS 28 for this standard

Control. This is greater than 50% voting rights. You consolidate the accounts backing out a minority interest for the amount you don't control. See NZ IAS 27 for this standard.

Now to your next point: Negative equity. To me, it makes sense that they are in negative equity as when you think of the history of Agria they:

1) Made a history of losses and therefore had negative "retained earnings."
2) They purchased their interest in PGW with all their spare change.
3) Raised more debt in the process of gaining control of PGW.

By doing this, they "lost" their assets from their balance sheet but kept the debt on it...combine this with their negative retained earnings, they are in negative equity position as a standalone company excluding PGW consolidated amounts.

That is why it is important for Agria to receive dividends from PGW...If you believe PGW will pay big dividends in the future, then Agria may be a good bet. However, they have nothing else going on ($10m Chinese revenue) and you are effectively supporting two corporate structures which makes the whole thing inefficient.

If you look at AGRIAs Balance sheet in 2010, that was the time when they owned only the 20% Portion of PGW they had only 23 millions debt and 245 millions in assets. Then David bought Goliath (50,1%), after that they had a lot of debt. But is that a problem ?

David Pascale (SVP of Agria):
>>The investment by Agria and partnership with PGG has been and remains mutually beneficial, positive and productive.<<

I can only hope that he told the truth. Up to now it is difficult to say where the advantage is. If a German
enterprise has a cooperation with a chinese partner, it works that we provide the technology and the chinese provide cheap labor.
Maybe the same for PGW Agria. This is all speculation.

But i know that prices for food are on the raise:
http://www.indexmundi.com/commoditie...corn&months=60


and the chinese want to eat beef in the future and not only rice, you need 8kg of maize for 1kg beef

http://www.indexmundi.com/commoditie...beef&months=60

therefore i think it was good idea for AGRIA to make such large investments. China is still the most growing market, and for me as
a German it could be a good idea to have some money invested in China and New Zealand. I think You know about our problems with our currency.

[Snoopy]

I know what you're saying Snoopy - these accounting standards are relatively complex and hard to understand at times. As I said before, I know NZ IFRS relatively alright but US GAAP not so well at all - all I know is there is a long term goal of convergence.

Under NZ IFRS you account for investments in companies the following way. I'm assuming the same is true for US GAAP under the "control" scenario:

<snip>

Control. This is greater than 50% voting rights. You consolidate the accounts backing out a minority interest for the amount you don't control. See NZ IAS 27 for this standard.

So U.U. what you are saying is if Agria was listed on the NZX and had to comply with NZ IFRS reporting standards then very probably the way Agria report their results would not be that different. When I think about it, there aren't too many shares on the NZX where one listed entity controls over 50% of another. So I am not used to reading those kinds of accounts.

I guess you have to draw the line somewhere. But it does strike me as somewhat artificial that the appearance of the Agria accounts would change so drastically if Agria were to reduce their percentage holding by a mere 0.23% (from 50.22% to 49.9%). The Agria report is written as though the financiers might go into a total panic if such an event occurred. Could financiers really be that fickle?

SNOOPY

[Snoopy]

Now to your next point: Negative equity. To me, it makes sense that they are in negative equity as when you think of the history of Agria they:

1) Made a history of losses and therefore had negative "retained earnings."
2) They purchased their interest in PGW with all their spare change.
3) Raised more debt in the process of gaining control of PGW.

By doing this, they "lost" their assets from their balance sheet but kept the debt on it...combine this with their negative retained earnings, they are in negative equity position as a standalone company excluding PGW consolidated amounts.

All right, I follow your explanation of how stand alone Agria transitioned into negative equity. What I don't follow is how their bankers allowed this to happen.

If I could make the housing analogy. What has happened seems akin to say I taking out a mortgage and buying a house. Then I chuck in my job (akin to Alan Lai buying out his original business partner and income stream from China) , borrow a whole lot more money against my house and proceed to spend it at the casino (hoping for a quick turnaround at PGW). Then the housing market collapses ( PGW share price goes from 60c to 35c).

Effectively then I now have no equity left in my house, no income and negative cashflow. I go back to my bank to get them to renew my mortgage. I know what the bank would say if I did that in New Zealand. Yet you expect me to believe that if I did the same in the USA, the bank manager's answer would be 'yes'?

SNOOPY

[Snoopy]

Why did Livestock Improvement Corporation provide a $10m loan to Agria? It seems to be nothing to do with any previous core business function they might have!

To answer my own question.

http://www.ruralnewsgroup.co.nz/dair...-for-agria-bid

LIC were banking on an early breakup of PGW into Agriservces and Agritech. At that point they would be interested in putting some more capital into Agritech. They saw the breeding of new superior mixes of grass as a promising future avenue for Livestock improvement.

That is a fair enough explanation. The loan to Agria was to get a 'seat at the table' when the breakup of PGW happened. But their loan to Agria expires at the end of the month. With the initial controversy of the original move, how far will their farmer LIC shareholder's patience stretch?

SNOOPY

[Snoopy]

That is why it is important for Agria to receive dividends from PGW...If you believe PGW will pay big dividends in the future, then Agria may be a good bet. However, they have nothing else going on ($10m Chinese revenue) and you are effectively supporting two corporate structures which makes the whole thing inefficient.

Genuine PRC male professional dancing requires a combination of skills: Strength, discipline and timing. Alan Lai will need all of these attributes if he is to pull Agria back from the brink.

I have been running some numbers over the standalone Agria bank loans to see how precisely those dance shoes will have to move.

We are told that Agria is being charged interest at 4.5% above the base rate. For his US loans I am assuming this equates to 6.5%. The US domiciled loans mature between January 11th 2013 and April 19th 2013 and total US$58.2m. That gives an interest bill of $US3.78m.

The New Zealand loans mature(d) over October 2012. The larger bank loan ($US19.7m) has already been renewed, and the smaller loan linked to LIC ($US7.9m) matures at the end of the month (Loans converted assuming $1NZ= 80cUS). I am assuming the NZ interest rates are higher say 8.5%. I calculate the total NZ domiciled interest bill to be $US2.35m.

This gives a total annual interest bill of $US6.3m.

Now running a check on my assumptions. Interest and finance expenses from the consolidated Agria revenue statement are declared as $US18.660m.

From the PGW FY2012 Annual Report, interest and finance expenses are $NZ15.469m. Multiply that by 0.8 and I get $US12.375m. So the underlying Agria standalone finance expenses are:

$US18.660m - $US12.375m = $US6.285m

That is in close agreement with my estimate of Agria's interest bill above, so I conclude that I am in the ballpark with my figures.

Now the question arises, what size of dividend will Agria need from PGW to pay this? If we take $US6.285m to be equivalent to $NZ7.856m, and we know that there are 754.849m PGW shares on issue, this means the bankable dividend needed is.

$NZ7.856m/754.849m= 1c/share.

Of course Agria only controls half of PGW. So if we back out the 'non controlling interest' the dividend will need to be 2c per share. That definitely looks doable if PGW performs as forecast over FY2013, even if it does assume PGW will continue to go well ($NPAT25m for PGW with a 100% payout ratio) But you also need to factor in the cost of the corporate structure of Agria before Agria shareholders make any headway above their operational costs. Thus even a 3c share dividend from PGW will see Agria only just cover their costs. It really is knife edge stuff for Alan Lai.

So can Alan Lai dance? October 31st 2012 is the bow in date for the next domino in line dance partner. Watch Alan's shoes. ' The question' will be answered very soon.

SNOOPY

[upside_umop]

All right, I follow your explanation of how stand alone Agria transitioned into negative equity. What I don't follow is how their bankers allowed this to happen.

If I could make the housing analogy. What has happened seems akin to say I taking out a mortgage and buying a house. Then I chuck in my job (akin to Alan Lai buying out his original business partner and income stream from China) , borrow a whole lot more money against my house and proceed to spend it at the casino (hoping for a quick turnaround at PGW). Then the housing market collapses ( PGW share price goes from 60c to 35c).

Effectively then I now have no equity left in my house, no income and negative cashflow. I go back to my bank to get them to renew my mortgage. I know what the bank would say if I did that in New Zealand. Yet you expect me to believe that if I did the same in the USA, the bank manager's answer would be 'yes'?

SNOOPY

Interesting analogy and something that would be considered by the banks. I guess the security that the banks would be looking at is the potential for the business to generate cash-flow as it is Agria that controls what happens with PGW's cash.

On one side, you look at PGW reducing debt but on the other, you have Agria increasing their debt. Although it's getting better and not as bad situation as it was, it's akin to margin lending on a highly leveraged company (say Centro properties in Australia).

Re the share price: This will and has got attention. As you previously mentioned, the auditors flagged the carrying amount of goodwill. Note 26 of the annual report outlines the assumptions used in support of the carrying value. I guess the bankers can look at this?

[upside_umop]

So U.U. what you are saying is if Agria was listed on the NZX and had to comply with NZ IFRS reporting standards then very probably the way Agria report their results would not be that different. When I think about it, there aren't too many shares on the NZX where one listed entity controls over 50% of another. So I am not used to reading those kinds of accounts.

I guess you have to draw the line somewhere. But it does strike me as somewhat artificial that the appearance of the Agria accounts would change so drastically if Agria were to reduce their percentage holding by a mere 0.23% (from 50.22% to 49.9%). The Agria report is written as though the financiers might go into a total panic if such an event occurred. Could financiers really be that fickle?

SNOOPY

Yep, that's what I'm saying. Perhaps look at Origin Energy in Australia? I haven't looked but assume it would be similar given their 51% shareholding in CEN.

I guess it's assumed that the financers should be aware of the treatment and take this into consideration. Further to the fickleness, there is an interesting Exposure Draft coming out in relation to what is control - from my understanding, it goes along the lines, that a company may have control if it owns 46% if only 90% of the shareholders have historically vote at an AGM. Therefore, consolidation might occur in the further if less than 50% voting rights. Don't quote me on that though...

[Snoopy]

I guess the security that the banks would be looking at is the potential for the business to generate cash-flow as it is Agria that controls what happens with PGW's cash.

Agria doesn't entirely decide what PGW does with their cash though does it? What about the banking covenants that PGW has signed with its own bankers? See my posts 1296 and 1298 and 2178.

SNOOPY