Conversion from an agricultural co-operative to a public company - A NEW BALL GAME

  • 29 November 2019
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Subsequently, with the 1994 changes in the political environment, the then Minister of Agriculture, Mr Hanekom, dissolved all the marketing boards and schemes, effective as from 1 May 1997. This entailed that producers of grain commodities were literally migrated from a controlled grain commodity marketing situation to a totally free market environment overnight. Deregulation meant that the prices of grain commodities were determined by import and export parity, national demand and supply, stock levels and the exchange rate. Price stability was replaced with substantial market volatility.

With the deregulation, the Agricultural Market Division (hereinafter referred to as “AMD”), as a separate division of Safex, was established as Safex functioned in financial markets since the eighties. Safex therefore also became the trading platform for commodities such as maize, wheat and sunflower and later soybeans. Price formulation for grains was done on Safex. In 2001 Safex formally became part of the JSE and is still known as AMD.

The above gave rise to fears of expropriation of the reserves of co-operatives comprising of general reserves as well as members' funds. In order to allay the fears and in an attempt to align corporate structures with the new free market, co-operatives proposed schemes of arrangement and with the approval of their members, elected to convert to public companies. The conversion meant that the reserves and members' funds were paid out to members in the form of equity.

For specifically Senwes, the change in structure also motivated the governance body of the time to embark on a growth and expansion strategy. Senwes’ vision was to become a “world class” organisation (annual report 1998, page 6). The diversification strategy to mitigate the exposure to the traditional business in terms of seasonality, led to unprecedented investment in different industries and geographic markets.

Senwes bought Vaalharts Co-operative in December 1996, invested in Heinz Frozen Foods (later McCain’s Frozen Foods), Senwesko Feeds, Continental Oil Mills, Country Bird (abattoirs), Profert (fertiliser), Epol and Kolosus (feedlots, leather & hides). With the Vaalharts acquisition, the company also became involved with the Hartswater Wine Cellar and a citrus packaging plant.

The company also pursued external investment in Mozambique and established Sabawes with local entrepreneurs. By the end of April 1999, nearly R500 million was invested in these agri-industries, while the core business such as grain storage and handling, contributed less than 10% of the company’s turnover. By 1991, R730 million was invested in the agri-industries and made up 49% of turnover. By then the group’s net profit before tax decreased to R12,2 million. By 2001 the financial results were far from satisfactory, reflecting a loss of R468 million. This included provisions for bad debt and write-offs of the investments of R400 million.

This approach created a new animal, which had to play a game in an unprotected, unsubsidised free market environment, with additional volatility in terms of grain price formation on Safex. Competitors such as the commercial banks and traders also accessed the market with different and attractive value propositions.

The expansion strategy, inter alia, destroyed immense value for the shareholders and by 2001 the shares of Senwes traded at very low levels. Eventually shares did not trade at all but were sold on auction, often with no bidders showing interest.

The shareholders were, understandably so, not impressed with the results of the group and shareholder activism led to changes in the board and management in October 2001. The former Vaalharts members also filed a lawsuit in an attempt to recover lost value and reclaim their members’ funds. By that time the financiers of the group, with the exception of the Land Bank, threatened liquidation of the company. The 'new' board was, however, able to convince them not to do so and had to present a detailed business recovery plan to prevent disaster.

In hindsight, it became clear that the ex-co-op was just not geared in terms of structures, systems and people to manage this rapid growth. Whilst attempting to resolve the “problem children”, the core business suffered and the debtor book grew beyond sound parameters.

To add to its woes, in May 2002 a group known as Landboulex launched a hostile takeover attempt and threatened legal action to recover the shareholders' destroyed value. For this to happen, they proposed that the board be removed.

In November 2002, shareholders rejected the proposed resolution with a vote of nearly 80% and mandated the board and management to proceed with the turnaround of the group. However, the issue of destroyed value as the elephant in the room still had to be addressed. Claims for negligence were instituted against previous management and board members, as well as external auditors, and added to the volatility in addressing the many challenges that the company had to deal with. To prove these claims became extremely difficult as documentary evidence and records were not readily available, the Kolosus head office was destroyed in a fire (very convenient) and potential witnesses were not keen to become involved. The claims were eventually settled.

During this time, and to ensure the survival of the company, loss-making business units and branches were sold or closed down and the staff complement of nearly 10 000 employees, was substantially decreased.

Reflecting on the progress made to date with the recovery, creation of value, capital growth and dividend yields since those unfortunate times, that era in the company’s history should rather be forgotten.

However, it is not as simple as that, as huge lessons were learned. The recent Steinhoff saga is a sad and stark reminder to the individuals close to the action of the importance of honesty, diligence, integrity, ethical conduct, transparency and accountability to always act in the best interest of the company. By not doing so, the consequences are severe. By continuing to learn and heed the past, this local agricultural giant will have a future and will prosper for another 110 years!