In a surprise move announced on October 21, the board of directors of Farm Credit Services of America (FCSAmerica) said they have taken the farmer-owned lending cooperative off the sale block. The directors terminated an agreement to sell Farm Credit Services to global banking giant Rabobank.
The board also rejected a merger proposal offered by neighboring AgStar Financial Services, another member of the national Farm Credit System. AgStar is based in Mankato, Minn. The FCSAmerica board also decided to distribute $55 million in patronage refunds to its borrowers.
FCSAmerica is the second largest co-op lender in the nationwide Farm Credit System. From itâ€™s headquarters in Omaha and with local facilities in four states, FCSAmerica serves 51,000 farmers in Iowa, Nebraska, South Dakota and Wyoming.
Rabobank originally offered $600 million for FCSAmerica last summer but increased the offer to $750 million late last month. AgStarâ€™s offer, made as a counter-proposal to Rabobankâ€™s bid, included a $650 million cash payment to FCSAmericaâ€™s borrower-owners.
There are 21,000 Iowa farmers who owe $3.16 billion to FCSAmerica. Thus, Iowa farmers account for about 40% of the Omaha-based cooperative lenderâ€™s loans.
Viewed as bad deal by many stockholders
The proposed buyout of FCSAmerica by Rabobank was first announced last summer. Lawmakers, farmers and others worried that a buyout by Rabobank would hurt the entire Farm Credit System, a national network of farmer-owned, farmer-controlled cooperative lenders.
Opponents of the sale spoke out loudly against it. They viewed it as a bad deal for FCSAmerica stockholders. But a "quiet period" enforced by the Farm Credit Administration (FCA) made it impossible for those in favor of the sale to present their arguments for it to take place, say members of the FCSAmerica board. FCA is the federal agency regulating the Farm Credit System.
"Unfortunately, the same rules didnâ€™t apply to other members of the Farm Credit System, who were free to comment on the transaction," says Bob Slaughter, a farmer from Osage, Iowa, who is vice chairman of FCSAmerica.
Opponents of the proposed sale say the FCSAmerica board made the right decision in deciding Farm Credit Services of America is no longer for sale. Merlyn Groot, a farmer from Manson, Iowa and a former member of the FCSAmerica board, says he and other stockholders asked the board to terminate the sale to Rabobank.
"It seemed to me and to many other stockholders that this was a bad business deal from the start," says Groot. "Iâ€™m not against Rabobank. If they want to loan money to farmers and a farmer wants to do business with them, fine. But there were a lot of other considerations in this particular deal."
Had the sale occurred, one such concern was the loss of unallocated assets belonging to shareholders of FCSAmerica. Another issue was the income tax liability the farmer-members would incur. Also, an independent consultant concluded that the value of FCSAmerica was a lot more than what Rabobank was offering to pay.
What was behind FCSAmericaâ€™s decision?
What caused FCSAmericaâ€™s board to decide to end the sale agreement? Brad Wright, vice president of marketing for FCSAmerica, says financial terms had changed in the proposed transaction between Rabobank and FCSAmerica. The likelihood of the sale actually taking place became very uncertain. For example, one of the financial parameters that changed was FCSAmericaâ€™s allowance for loan losses.
When FCSAmerica and Rabobank originally set up the deal, Rabobank was going to pay the exit fee for FCSAmerica to leave the federally chartered Farm Credit System. That payment was announced as being $800 million and would have had to go to the Farm Credit System. Now, based on FCSAmerica's latest estimates of closing and timing of the transaction, the exit fee would probably have been closer to $900 million.
"There are some significant financial reasons behind our decision to end the sale," says Wright. Decisions by the Farm Credit Administration, the federal agency regulating the Omaha bank, had delayed the proposed sale and made it more expensive, he adds.
Another factor was the unfavorable reaction of a number of FCSAmerica borrowers and other members of the Farm Credit System. "Many FCSAmerica borrowers didnâ€™t want to see their loans taken over by a foreign bank," observes Groot.
"We received quite a bit of commentary from stockholders and customers," says Wright. "As you can see from the public commentary, there were many people opposed to the transaction. But a lot of our members also said they wanted to see our information statement and wanted to have the opportunity to vote on the proposed transaction."
"We did hear quite a few comments," says Wright. "One of the main themes we heard from our farmer-members, who are our stockholders and borrowers, was that they wanted more information about the proposed sale. But in the regulatory environment in which we were operating, we were prohibited from disclosing very much until the official FCA required information statement was distributed."
What was the reaction from FCSAmericaâ€™s board of directors to the announcement the deal with Rabobank would be called off? "Our board of directors was disappointed with the way this proposed sale turned out," says Wright. "But I believe that they acted in the best interest of our stockholders."
Whatâ€™s next for FCSAmerica?
Where FCSAmerica go from here? "Our board also took action on a patronage program," explains Wright. "We will be distributing approximately $55 million to eligible customers based on their 2004 loan and lease balances. We anticipate paying that in early 2005."
For every $100,000 in loans, borrowers will receive $750 early next year. This is the first time that the borrowers of FCSAmerica will receive a patronage payment.
"In summary, we made a bold effort by trying to put together a deal with Rabobank. We were trying to improve our services to customers. It didnâ€™t work out. But we at FCSAmerica are still as dedicated to lending money to farmers and supporting agriculture as we always have been. Our board and our FCSAmerica team are looking forward to continuing to serve the financial needs of our farmer-members and others in agriculture in the future."
What about AgStarâ€™s offer for FCSAmerica? "We havenâ€™t heard anything officially from AgStar," says Wright. "Our board did reject the merger proposal submitted last summer by AgStar. Most of the reasons were financially related. FCSAmerica would have had to have a significant restructuring of its balance sheet. FCSAmerica would have had to do things like issue preferred stock to other Farm Credit System entities."
"A lot of the financial conditions of an FCSAmerica-AgStar merger would have led to an organization that had a capital position that would have been among the weakest in the Farm Credit System," says Wright. "Thus, that would potentially jeopardize our ability to stay with customers throughout the economic cycles in agriculture, which we know go up and down over a period of time."