New Zealand-Farming giant may have to fork out millions.

A sharebroking house analysis that a claim of up to $144 million could be made against PGG Wrightson (PGW) for failing to buy the agreed 50% stake in Silver Fern Farms has merit, says the meat company’s chief executive Keith Cooper.

"It has some logic,’’ Cooper said of the Goldman Sachs J B Were analysis. "I don’t think you could come up with a lesser figure, but you could get a larger one. I can see how they got there.’’

Silver Fern has dismissed out of hand a PGW offer of a $10m compensation payment for its failure to pay the $220m required for the unconditional contract to buy the half share. This would include $3.5m to cover Silver Fern’s actual costs.

The costs figure is accurate, but Cooper said his company is still working through the formula for assessing its overall loss of benefits caused by the PGW failure and does not have a compensation figure in mind. The issue was complex because the deal involved an issue of shares and a transfer of assets.

This formula would cover the impact on the meat company’s ability to pay down debt, build up its brands, market development, planned step-up of technology in its plants and the gains from a combined stock procure business, all gains which had been promised by the partnership.

Cooper said Silver Fern did not have a compensation figure in the $70m to $80m range, as some industry watchers have suggested to The New Zealand Farmers Weekly. However, the $10m offer was grossly inadequate.

Goldman Sachs said its $140 claim figure (on top of transaction costs of $4m) was based on capitalising the synergy savings of $60m in procurement and supply chain benefits under the planned partnership, using a 15% cost of capital.

Its comment that such a claim would put PGW’s balance sheet under further pressure, possibly requiring a capital raising and/or asset sales, took the floor out from under PGW’s share price. In two days it fell more than 31%, from 120c to 82c at time of writing.

Cooper said talks between the parties had not broken down, though they might need the involvement of a third party, along the lines of mediation suggested by PGW. Silver Fern was considering that proposal.

Silver Fern has not reached the point of deciding on litigation. Cooper said that to say legal advice was that it had a very strong case was an understatement.

PGW has clearly admitted that its failure to complete the deal entitles the other company to compensation.

A leading commercial lawyer said that PGW’s directors had been negligent in drawing up an unconditional agreement, especially given that the timing coincided with the international credit crisis. "Silver Fern has a very strong case and (PGW) is not in a good space.’’

The lawyer, who asked not to be named, said he did not know the figures behind the potential Silver Fern claim but $10m looked "a bit thin’’. "The courts would look at the actual losses which Silver Fern could demonstrate in terms of how it planned to use the money, and these could be quite large.’’

With PGW certain to contest and delay court action, he said a ruling on a claim would take about two years to achieve, and it was possible that to avoid this and the accompanying litigation risk, Silver Fern would decide its best course was to settle for a percentage of its losses.

Besides its compensation offer, PGW wants to put in place a co-operation agreement, mainly in stock procurement, arguing that Silver Fern’s current shareholders would receive all of the economic benefits of this rather than the half it would have had with PGW as a 50% shareholder. Silver Fern would continue to benefit from the ongoing stock procurement relationship between the two companies. Goldman Sachs noted that there would also be a benefit in cost synergies to PGW from a co-operation agreement.

Cooper’s response was that this would effectively be a system in which PGW would be "clicking the ticket’’ on stock supplied. "We sold this deal to our shareholders as one transaction, with all those benefits, not just a procurement agreement in isolation.’’

He said Silver Fern’s duties to its shareholders meant it had little latitude available to it. "We have to enforce the contract. This is not our doing. (PGW) failed to pay us, and they have caused all these implications.’’

PGW has made a provision for a $10m compensation payment in its half year accounts to December 31, due to be released this Thursday. The lawyer spoken to by NZ Farmers Weekly expected that it would have justified this amount to its auditors.

The accounts will also include a writedown, of possibly up to $30m, on the value of its shareholding in New Zealand Farm Systems Uruguay, as well as mark to market valuations of interest rate hedges and the company superannuation funds. These funds were mainly in sharemarket investments last June 30.

PGW has already told the market that the half year trading profit will suffer from a loss in the real estate business.