The Howard Cedric Zingel Motion

I received a letter in the mail from Tony Gibbs today.  Not that I was the only one who was privileged in this way.  Every shareholder of Turners & Growers would have received the same letter.  Yes, you have heard right, Sauerkraut likes to keep his nose close to the wind and therefore invests in produce companies.  Not that you will find my name on the share register – John Key and I both manage our investments through trusts.  There are two significant differences though.  Firstly, John Key has access to a smidgen more capital than Sauerkraut and therefore tends to purchase slightly larger share parcels– and secondly, there is nothing blind about Sauerkraut’s trust!

Bu t I digress.  Anyway, this letter arrived today inviting me to the Turners & Growers AGM.  A couple of proxy forms were also floating around in the envelope and then there was this other letter.  A letter from one Howard Cedric Zingel.  If you now want to know who Howard Cedric Zingel is, you are asking the wrong cabbage head.  A quick Google search reveals that Howard Cedric Zingel lives in Tauranga and seems to be someone who invests in the share market from a position of knowledge, being a longtime member of the NZ Shareowners Association Inc.  So we have to assume Mr. Zingel takes his investing serious.

And serious investor that he is, Mr. Zingel intends to propose a Motion at the 2010 Annual General Meeting of Turners & Growers Ltd on 24 June 2010.  If you are interested in reading the Motion in full, you can satisfy your curiosity here, and if you want to know what Tony Gibbs thinks of the Motion you can check that out here.

The short version goes something like this:

Mr.  Zingel wants Turners & Growers to engage the services of Price Waterhouse Coopers  in order to establish whether shareholder dividends and capital could be maximized if “the growing assets of the Group could be split off and the worth thereof returned to shareholders.”

Alan Gibbs’ letter inviting me to the meeting and advising me that I get to vote on Howard Cedric Zingel’s Motion gets straight to the point.  “The Board,” says Tony Gibbs, “does not support this resolution on the basis that the retention and growing assets is consistent with the long-term strategic objectives of the group.”

So there you have it.  As the Board votes the majority of the stock, Mr Zingel’s Motion will be handsomely defeated.  And this is where this story could stop.

It is too good a story to be stopped at this point though.  There are several reasons for this:

  1. The Motion challenges the core of what all corporate advisers have been advising their clients. for years – opt for vertical integration wherever possible.
  2. The facts speak for themselves.  Numbers do not lie.
  3. This is Turners & Growers we are talking about, still considered by many to be a, if not the, commercial Doyen of our industry, albeit with a new emperor.
  4. Mr. Zingel puts up an intelligent and articulate argument and the issues surrounding the Motion and its naturally present alter ego deserve exposure.  Our industry will wither on the vine without robust debate – and Turners & Growers certainly knows all about debating contentious issues.

So I will attempt here to look at the argument contained within the Motion from an objective perspective – the objective being to provide a considered opinion to the debate, to inform and to get more industry participants to consciously think about the issues raised by Mr. Zingel. 

The core of Mr. Zingel’s Motion is that Turners & Growers shareholders are disadvantaged because  the growing activities of the business are returning insufficient yield if  at all and, he suggests, are being propped up by the trading business.  Mr. Zingel draws the conclusion that whilst the balance sheet of the company most certainly recognizes the value of the company’s land assets and reflects this in the net asset backing per share of 276 cents (Dec 09), “the share price at the time was only half of that value.”  He also suggests that businesses base on land value achieve better returns when “transparency and a bankable strategy” are in play as the market then has a greater degree of confidence to back that business.

At first glance, it is difficult to argue with Mr. Zingel.  The data he presents in support of his Motion appears to be very plausible – and it would indeed be nice to enjoy a dividend that is greater than just 1.7% of revenues.  He also points out that the company’s brands such as ENZA have no presence on the balance sheet.

Readers might not be surprised that I have an opinion on the matter as well – and not just from the position of shareholder.  Over the years I have bought from Turners & Growers, I have fought with Turners & Growers, I have consulted to Turners & Growers and I have advised other clients on how to manage their relationship with Turners & Growers.

Turners & Growers’  future as a pure trading house would be somewhat limited.  Traders notoriously sit between chairs and have to work extremely hard to add any value in an environment where supermarkets like purchasing directly from growers and growers feel that they have the skills to sustainably manage their own export portfolio, thank you very much.  Supermarkets also fancy themselves as importers and anything that does not require substantive value add upon arrival in the country is fair game for fledgling retailer import departments.

Turners & Growers therefore needed to reinvent themselves if they wanted to stay relevant and alive.  The space between chairs had become a bit lonely, value-add opportunities where somewhat limited for middlemen, so what were the options?  Open your own retail chain and compete with your customers?  Not a good move in anyone’s book.  That left vertical integration in the production aspect of the value chain – which lead to the ENZA merger after Mr. Gibbs had achieved deregulation of the pipfruit industry, the creation of the Status tomato business, the acquisitibusiness. of citrus grower, trader and exporter Kerifresh and a small stake in NZKD, a Dargaville based kumara packer.  All these decisions made perfect sense from the position of a trading house looking for its new place in the sun.

Incidentally, the company’s dogged attempts to liberalise the kiwifruit trade need to be seen in the same light.  What also should be remembered that the Turners & Growers directors need to be cognizant of the Commerce Act which governs directors’ behaviour and expects directors to act at all times in the interest of the business.  But I am digressing again.

Given that the company in Sauerkraut’s humble opinion, would not survive without its strategic position in production horticulture, splitting the land assets from the trading business is not advisable.  Product brands are intangible assets and companies who are conservatively and prudently managed financially, typically keep brands and other intangible off the balance sheet.  Prudent management is the order of the day I am afraid in the produce business and the international produce scene is littered with prominent produce brands with rather checkered performance as a result of prudent financial management not being a priority.

Sauerkraut therefore cannot support Mr. Zingel’s Motion and will vote accordingly.  Howard Cedric Zingel needs to be thanked nevertheless for his contribution to the debate on how Turners & Growers should move forward.

Maybe, it is time for a name change to reflect the new reality.  How about “Turners are Growers”, or “Turners the Growers & Growers”?  Just kidding. 

Or on a more serious note why not just  ”T&G”, the abbreviation which is already commonly used?

This brand evolution worked wonders for KFC.  Does anyone still remember that this chain was once called   “Kentucky Fried Chicken”?

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