Former Hanover investors' interest in Allied Farmers to be slashed

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The former Hanover debenture holders who converted their investment into Allied Farmers' shares in December 2009 are facing their ownership of the company being slashed from 93.6% to possibly less than about 33% by mid-November.

Thursday, October 6th 2011, 4:26PM 6 Comments

by Jenny Ruth

In light of their already massive losses - whether Allied Farmers is worth anything now is questionable - the Hanover investors are unlikely to be happy Allied Farmers' directors collected $802,388 in fees, including the $634,866 paid to now departed managing director Rob Alloway, up from the $558,772 directors collected the previous year.

Allied Farmers' annual report also shows it has reached a settlement with Hanover over a $5 million disputed payment. Hanover has foregone payment in exchange for Allied Farmers admitting its various adverse statements about Hanover's conduct "were without merit and unproven."

Allied Farmers has made an unspecified contribution towards Hanover's legal and settlement costs and says the terms are confidential.

The report shows those who held Allied Farmers' shares before the Hanover transaction will be issued a further 118.1 million shares to reflect the shortfall of the value of the Hanover assets valued at $396.2 million in December 2009. The assets were valued at $110 million at June 30 last year and Allied Farmers has written off a further $34.1 million in its latest report.

As well, the institutions who invested $2.25 million in 90 million Allied Farmers shares at 2.5 cents per share through a share placement in August last year are entitled to a further 977.4 million new shares because of the precipitous fall in Allied Farmers' net tangible assets since then.

However, there's a catch: NZX listing rules don't allow the company to issue more than 20% extra shares in any one year without shareholder approval. That means it can issue only 390.6 million to those institutions now and is asking shareholders to vote in favour of issuing the remainder at the annual meeting on November 29.

The report doesn't say whether there will be any consequences if shareholders vote against issuing the remaining shares. If they vote against issuing the new shares, the Hanover investors' interest in Allied Farmers will fall to 74.9%; if they agree to the remaining shares being issued, their holding will fall to 60.9%.

It is inevitable their interest will be further diluted because Allied Farmers has $12.6 million of capital notes maturing in mid-November. The company says the notes' trustee wouldn't agree to any alternative proposals, leaving it no option but to convert the notes into equity.

The notes will convert at a 5% discount to the weighted average share price over the 20 business days before the November 15 maturity date. If the notes were converted at the current 0.4 cents share price, noteholders would receive 3.15 billion shares, taking Allied Farmers' shares on issue to 5.7 billion, assuming shareholders vote in favour of issuing shares to the placement shareholders.

The note conversion will have the benefit of turning Allied Farmers' negative $5.5 million equity at June 30 (down from the previously reported $6.4 million negative equity as a result of post-balance sheet events) into positive territory.

Unsurprisingly, Allied Farmers' auditor, PricewaterhouseCoopers, has cast doubt on whether Allied Farmers continues to be a going concern which depends on "the generation of sufficient future cash flows, the ability to source new funding, and the remediation of the group's negative equity position."

One key to the company's continued existence is the support of the receiver of its former finance company, Allied Nationwide Finance, to which Allied Farmers owed $19 million at June 30.

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