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One of the major investors in a Rural Funds Group (ASX:RFF) poultry business have come out swinging against the parent this morning, adding to the significant pressure being faced by RFF.
Kaizen Capital owns 19.51 per cent of RF Poultry Limited (RFP), an NSX listed fund that manages RFF's chicken growing activities.
The major shareholder has claimed that Rural Funds Management (RFM) is selling the poultry business for cheap, saying this 'fire sale' to ProTen Investment Trust is not in the best interests of RFP's unitholders.
RFM proposed the sale of RFP to ProTen on the 28 October, 2019 for approximately $0.80 per unit.
The group was unsuccessful this afternoon however, with the motion to pass the sale of RFF defeated 65 per cent to 35 per cent.
This morning Kaizen, in a 17-page letter to RFP first published by The Australian Financial Review, said it intended to vote against the transaction.
"In our view, the estimated capital return, which is expected to result from the Proposed Transaction of approximately $0.80 per unit, significantly undervalues RFP and its business," said Kaizen director Connor Grindlay.
Additionally, Grindlay raised concerns about a potential conflict of interest, claiming all the same people represent all of the same entities.
"We have found the farm leases on the public record (that you refused to share with us)," says Grindlay.
"You act as both lessor and lessee and the contracts you've struck, with yourself, contain poison pills which prevent a third party from changing the responsible entity or effecting a change in control."
"Both these events can lead to a termination of the leases by you, and destruction of all value in RFP."
"We have serious concerns that a rent review process, explicitly defined in the leases to protect the chicken grower Gross Margin, has not happened due to the same boards acting on both sides of the leases."
The allegations from Kaizen mirror the position Hong Kong-based "creative accounting" researcher Bucephalus Research took just last week.
Bucephalus alleged filings made by RFM to the Australian Securities and Investment Commission (ASIC) demonstrate a "self-dealing circularity" with RFF whereby rents are inflated, thus lifting property valuations and in turn, management fees paid to RFM.
The Hong Kong-headquartered firm, which has often been misrepresented as a short seller, previously alleged RFF was a "Ponzi scheme that could collapse at any time".
This came in the wake of short seller Bonitas Research's allegations of fraud and asset inflation at RFF, along with questions about the incentives arising from board member overlap at the agricultural property owner and its unlisted management company.
"In three out of four years, RFM farms lost money. Despite this, it pays disproportionately high rents to RFF," Bucephalus said in its latest report.
"It is these rents that boost valuations and ensure that RFF unitholders pay ever higher fees to RFM. It is easy to see how management benefits at unitholders expense.
"RFM loses money farming RFF assets. This is a concern because the group breached covenants in 2019, yet the unitholders are guaranteeing RFM's loans."
Kaizen's Grindlay continues in his letter to address concerns over elevated capital expenditure and whether RFP is shouldering the burden of RFF's responsibilities.
"Profitability has been, materially, negatively impacted at RFP and whilst protective mechanisms exist in the leases to recover this through rent reductions (to RFF) they have never happened," says Grindlay.
"We believe that had the adjustments been enacted RFP would a) be profitable b) not suffered a 54 per cent reduction in cash and c) have a positive future."
Kaizen wanted to meet with RFM within 24 hours, for the meeting to vote on the sale do be delayed, and an independent expert to investigate RFP to be appointed. But with the motion now carried it seems that Kaizen has been defeated.
"We believe it is in the best interests of unitholders to begin an independent sale process we are happy to be involved in this as the largest unitholder with close to a 20 per cent holding. Our interests are aligned with the 5000+ small retail unitholders," said Grindlay before this afternoon's unitholder meeting.
"We have been disappointed by your treatment of a major unitholder of RFP with our views ignored and been excluded from the process."
"If RFM continues to ignore our serious concerns we reserve the right to take such action as we believe to be in the best interests of unitholders. This may include taking action to prevent the unitholder meeting from proceeding, requiring updated disclosure or making public announcements on our views on the matters detailed in this letter."
Shares in Rural Funds Group are up 0.27 per cent to $1.85 per share at 12.08pm AEDT.
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