Sell to Rabobank or Merge with AgStar?

Unallocated retained earnings make FCSA an attractive target. John Otte

Published on: Aug 18, 2004

Leaders from AgStar made whistle stops in Nebraska, Iowa, Colorado and Wyoming Wednesday as they unveiled a new five-point proposal to merge with Farm Credit Services of America (FCSA).

In July, AgStar proposed to merge with FCSA. But FCSA leaders chose an acquisition proposal by Dutch-based Rabobank to buy FCSA over AgStar's merger proposal.

Mankato, Minn.-based AgStar is a cooperative that grew out of a merger of the St. Paul Federal Land Bank and St. Paul Federal Intermediate Credit Bank in the mid-1980s. FCSA is a similar Farm Credit System lender that grew out of the Omaha Federal Land Bank and Federal Intermediate Credit Bank.

AgStar proposal

Paul DeBriyn, AgStar president and CEO lists highlights of AgStar proposal:

  • A merger would create a financially strong and progressive Farm Credit System lender with a statutory commitment to serve rural America through good and bad economic times.
  • FCSA stockholders would receive a $650 million capital cash distribution after closing
  • FCSA stockholders would receive ongoing patronage dividends in future years.
  • FCSA stockholders would preserve ownership and control of the new entity.
  • The new institution, as a member of the Farm Credit System, would continue to have access to competitively priced funds to lend to farmers.
  • Headquarters would remain in the Midwest, not in Europe.

AgStar anticipates no changes in office locations or client service teams.

Stockholder equity is a big issue

"I expect much debate in Congress and within the Farm Credit Administration (the Farm Credit System regulator) on how to unwind a federal charter," says Bruce Sherrick, University of Illinois economist.

"At a minimum it will cause the entire system to rethink their patronage policies," he adds. "How they handle these big buckets of unallocated retained earnings is turning into the real Achilles heel of this whole situation."

Other FCS institutions are targets

"More important than the answer to this particular question is the precedent it sets because several associations in the system have more than 6% retained earnings," explains Sherrick. "The only unwinding rule now has to do with the amount of capital that they pay back to the insurance corporation. Anybody who has more than that is a de facto target. They picked the old Omaha bank, which became an association, because it has the greatest balance of unallocated retained earnings. If you could buy a dollar for 94 cents, how many of them would you buy?

"So now the question is who is willing to pay closest to a dollar for each dollar's worth of assets," adds Sherrick. "And the unwinding of the government charter means that somebody else could come in and arbitrate whether or not the highest bidder actually gets it or not."

Credit links potentially stifle objections

"Most of the other Farm Credit Institutions are caught in a terrible standoff," says Sherrick.

"They have the largest number of participations with Rabobank, so they can't really go out and oppose what is happening," he explains. "But they all have a bit of fear about charters, territorial concerns and what it means for long term viability."