The Melbourne-based agricultural chemical group, Nufarm, has exposed the extremity of the idea of aligning management and shareholder interest by allowing managers to build up big stakes in companies.

CEO Doug Rathbone has 11.2% of the company, which has just come through a torrid year, with soaring first-half profits and then a second-half collapse, compounded by poor management (and board, it seems) decision making.

So big were the stuff ups in the second half  that the company’s financial health has been weakened, Standard & Poor’s, the big credit rating group, looks like cutting Nufarm’s rating, and a Chinese buyer, SinoChem, won’t complete a suggested takeover at $13 a share, (total value $2.6 billion) as a result of finding problems in the accounts.

In short, there are lot of problems, but as yesterday’s AGM in Melbourne showed, there’s plenty of mea culpas, but no one stepped up to the microphone and quit, especially not the man at the pointy end of the decision making, Rathbone, whose stake has a current market value of about $260 million.

Chairman Kerry Hoggard went into deep confession mode in his speech; Rathbone wasn’t far behind. But neither put their hands up and said, “it wuz me” and and no one from the top rung of the company (including the board) has been marched out the door with a pink slip. In fact it looks as though everyone shares in the blame, and would be a tad unseemly for everyone in the boardroom to be walking the plank.

Perhaps the only thing that has saved everyone is that every major player in the agricultural chemicals market also got hit by a combination of tight supply, the global credit crunch (which cut credit for farmers in many countries), good growing season, falling demand and a surge in supply of a key chemical from China.

So shareholders were told that first-half profit will be down, things will hopefully get better in the second half and Nufarm also said it won’t accept a lower offer from its Chinese suitor and its board will consider alternative proposals after the takeover deadline lapsed without a deal.

But the speeches by Hoggard and Rathbone contained enough detail for outsiders to understand why  SinoChem developed cold feet about the $13 a share price and wanted to offer less. The Chinese would be mad to pay the previous price, based on what was outlined to shareholders yesterday.

Sinochem knows the company is financially weakened and therefore worth less at the moment and sees a chance to snatch control for less than it was prepared to pay before the due diligence started from late September, when the proposed bid was revealed.

“Sinochem has raised what it has described as a number of issues with Nufarm arising from its due diligence. To the extent that we can, Nufarm will work with SinoChem to provide further information and clarification on some of those matters,” Hoggard told the meeting.

“I would like to make clear, however, that your board has reviewed the company’s position with respect to those issues and does not consider that they impact the board’s previous view of the appropriate value required to secure board support for a takeover offer. The board has agreed to an extension on the basis that if SinoChem confirms its intention to proceed, it does so at the previously agreed indicative price of $13 per share.”

Hoggard told shareholders the 2009 result — a 42% drop to $79.88 million  — was a “‘poor quality performance”, reflecting the very adverse affect of “some misjudgments”.

(Just who was to blame for these wasn’t made clear)

Hoggard’s speech was actually a bit refreshing in that it was frank on the reasons for the profit slide, but unfortunately, didn’t name names.

“It would be inappropriate to address this meeting and make excuses for that performance as quite simply there were a combination of market changes and — with the benefit of hindsight — some misjudgments which had a very adverse impact on the result.

“It is, however, important that shareholders understand the major reasons for the 2009 performance. To a very large extent the critical aspects involved trading in the Glyphosate market. This is the company’s largest individual product and represents between 35% and 40% of our total international sales.

“In the second half of the 2008 financial year Glyphosate raw material supply was very tight and the company was unable to meet some of our customer demand. The price of raw materials rose by over 400% and product was purchased late in the 2008 fourth quarter to ensure customers would be supplied in the 2009 year. Much of this high priced product was in stock at July 31, 2008.

“Our market intelligence failed to recognise that in this same period new productive capacity (particularly in China) had been commissioned and world productive capacity rose to well in excess of demand. As a result, the price of these raw materials dropped rapidly to return to previous levels. Whilst it is no consolation … the world’s leading glyphosate suppliers all found themselves in the same position.

“The combination of these factors resulted in the profitability of the company falling well short of budget and also had a very adverse impact on cash flow and the balance sheet ratios.

“The other major individual item was in Brazil where the business was significantly impacted by credit related pressures.

“I acknowledge a recent statement from the ratings agency Standard & Poor’s which has stated that Nufarm remains on ‘Credit Watch’, pending the outcome of Nufarm’s negotiations with SinoChem.

So in effect the board and management were caught short by a rapidly changing market, tried to trade its way out of trouble, and failed, hence the slump in earnings and a weakened balance sheet that has a rating agency raising a red flag, and the prospective Chinese buyer baulking at paying $13 a share.

But when the CEO (where all decision making starts and ends), owns 11% of the company, it would be a brave board indeed to make him walk the plank. Shareholders won’t get a $13 a share offer, which would have seen Rathbone receive more than $280 million, which could be punishment enough.

Peter Fray

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