A new strong-wool marketing co-operative will proceed only if there is confidence shareholders will subscribe for 65 million $1 shares within a year of launching.
In another development, United States carpet manufacturers are warning the speed with which wool prices have risen could force them to look at using blends with cheaper wool or to switch to synthetics.
Wool Partners Co-operative (WPC) chairman Jeff Grant would not say how close the co-operative was to achieving the $65 million share subscription target needed to start the new co-operative, but said it would proceed only if growers committed to $55 million of shares and there was an indication it would reach the $65 million within 12 months.
If directors concluded the larger target could not be reached, WPC would not proceed, he said.
"If we think we have run the tank dry, that we will not get there, then we won't proceed."
Mr Grant said subscriptions had picked up in the last two weeks but conceded the second half of the process was more difficult than the first.
"It is just about impossible to predict," he said.
Meanwhile, Wool Partners International chief executive Iain Abercrombie said the speed with which wool prices had risen had prompted some United States wool users to consider switching to synthetics, saying trying to forecast wool prices had become a gamble.
Mr Abercrombie has just returned from flooring trade fairs in the US, and said manufacturers were not concerned at the level wool prices have reached, but rather at the speed of the increase.
After 25 years of decline, auction prices have risen 60% in six months, which Mr Abercrombie said made pricing impossible for carpet manufacturers, who negotiated contract prices with retailers 12 months ago.
"They've got to absorb it, whereas with nylon and synthetics, it [pricing] seems to be more structured."
WPC is seeking wool grower support to create an integrated wool marketing company that will use branding and relationships with end-users to add value and replace boom-and-bust price cycles with sustainable, less volatile pricing.
Mr Grant said the recent price appreciation had prompted some growers to believe prices had recovered and would continue to rise.
"The reality is we have a price spike due to a lack of supply and that leads us to another part of the argument: is it sustainable? Will it last three or four more sales?"
There was no certainty or guarantee wool prices would continue to appreciate, with Mr Grant saying price had soared once before, only to collapse six weeks later.
"We are very strongly of the view about the volume game, both in the way we operate and, more importantly, about getting change in the way the industry operates and not relying on auction in the long term, but getting more money and control."
Mr Abercrombie said US wool buyers and manufacturers had told him they supported a farmer-owned co-operative such as WPC because it would bring them closer to, and allow them to deal directly with, the wool-grower; and because it would provide stable prices for planning.
While he was in the US, manufacturers had been telling him about the problems of unstable pricing, only for Mr Abercrombie to inform them that at the latest auction prices had increased a further 50c a kg.
What issues are disputed?
With nine days to the deadline for growers to buy shares in Wool Partners Co-operative (WPC), opposition to the new wool marketing co-operative appears to come down to six points. The Otago Daily Times asked five of these questions to WPC and one to PGG Wrightson.
Here are their answers:
1 Will WPC inherit a $24 million debt from Bloch and Behrens?
WPC: Yes, as part of the purchase of Bloch & Behrens, WPC is taking on a debt of $24 million owed to the ANZ Bank. Growers need to be aware of four things in relation to this debt:
a. It is debt used to support the working capital of Bloch & Behrens - the inventory it buys ready for sale and the payments due to it from international customers. It is typical for wool exporters to provide this financing to the industry as set out on the NZ Council of Wool Exporters website (under the united wool marketing group).
b. The total amount of debt used by Bloch & Behrens is broadly comparable with that used by other exporters for whom public records are available. They are not directly comparable because terms of trade vary between markets and each business operates slightly differently, but all carry high levels of debt.
c. The purchase price for Bloch & Behrens was based on the net assets of Bloch & Behrens, that is, total assets less this debt, which gives the purchase price of $2 million.
d. The facility with the bank is relatively short term because it is a working capital financing facility, and therefore the assets it funds are short-term.
2 There has been some disquiet the same directors and management will shift from Wool Partners International to WPC.
WPC: Growers will own the company so to the extent they are concerned about directors, they will be able to elect new ones at the annual meeting.
As part of the board rotation, Sir Brian Lochore and Jeff Grant will be standing down from the board at the first annual meeting.
With regard to management, WPC has always said in the prospectus that we will be able to select from employees of Wool Partners International (WPI) and the market in general, but we can't make any decisions on that until the company is up and running.
It is expensive to recruit staff into a company that may not get across the line.
3 Doubts have been raised about the financial performance of businesses WPC will buy and the absence of the valuation methods used to determine the purchase price.
WPC: While it is appropriate to question the financial performance, it is also important to remember that WPI itself is only two years old and has been trying a number of different concepts to try to bring change to the wool industry since it was formed.
Whenever you are trying to change a business, there are a range of costs, both in terms of the management effort and also through bringing customers and suppliers along.
Hence the historical performance of WPI isn't, in the view of the board, a particularly accurate view of how the business will perform going forward.
That is why the board has encouraged growers to look at the prospective financial statements rather than the historic ones.
In addition it should be remembered that the structure of WPC commits growers to supply wool to the co-operative on an ongoing basis, which in turn allows efficiencies across various parts of the business such as wool supply.
With regard to the purchase price, would we have liked to have paid less? Yes.
But the price paid is what was needed to purchase an infrastructure that will be up and running from day one and is a fair price, given the performance that business is capable of delivering.
The opportunity cost if growers had to wait to build their own business from scratch or don't pursue this opportunity could be much higher.
4 It has been claimed that buying goodwill was rare and that valuing it at $14.799 million was excessive.
WPC: The goodwill shown in the balance sheet of $14.799 million is simply the goodwill that currently exists in those parts of WPI currently being purchased.
Under the IFRS accounting standards, the goodwill is not adjusted through this transaction.
That said, the goodwill WPI is being paid for is near to this number which reflects that most of the assets in the business are intangible in nature, such as brands, customer and client relationships and systems and processes.
5 Is it fair that growers commit all their wool to WPC?
WPC: This question really goes to the heart of what it means to be a co-operative.
A co-operative is about growers with a common interest working together to own something of a scale and size that is large enough to represent their collective interests, recognising that individually they lack the scale to compete in the market but collectively they can be strong in the market.
Growers need to think of WPC as the marketing arm of their wool growing business.
Their farm is a superb factory that manufactures the world's best carpet wool, but to get maximum value for it, they need to also take responsibility for the sales and marketing of that wool to the end customers.
If you own your own sales and marketing business, why would you want the flexibility to then sell your product through a competing business? If you don't like the performance of the business you own, then rather than support a competitor you get in and make changes.
That is what co-operatives are and that is what they do.
Further, long-term supply commitments are common in other co-operatives such as the dairy industry.
6 Is PGG Wrightson trying to quit its loss-making wool business?
PGG Wrightson: The suggestion that PGGW's wool business was loss-making and that PGGW is trying to quit it, is rubbish. Under PGGW ownership the wool business returned a steady return.
In both 2008 and 2009 it was $3.2 million before tax with earnings before interest, tax, depreciation and amortisation (EBITDA) ofabout $5 million.
WPI's performance hasn't been as good as the business achieved under PGGW ownership because there are significant additional costs in setting the business up on a stand-alone basis, and because WPI has been trying to do a range of things to bring change to the industry.
To clarify PGGW's position, it wasn't trying to sell its wool business, but was approached, along with other businesses in the wool industry, by the Wool Industry Network (WIN) who were seeking to facilitate grower ownership of the industry.
PGGW felt that it was in the best interests of growers to support this endeavour, and worked on commercial terms with WIN to establish WPI.
The arrangements between PGGW, WPI and Wool Grower Holdings (WGH) were done to allow a structure to be established ahead of a grower capital raising, and reflect the fact that neither WIN nor WGH had any capital to contribute at the time.
With the benefit of hindsight they may look complicated but were done at the time with the best of intentions, and to ensure a commercially acceptable outcome to all parties.