EG Green failure report

Failed beef processor EG Green Group received three proposals from industry investors in the weeks before it went into administration but was unable to finalise any of the deals.

The company received proposals from New Zealand’s Lowe Corporation, WA livestock exporter Wellard Group and Futuris subsidiary Elders, with the latter proposing the establishment of a new jointly owned business.

None of the proposals came to fruition, despite EG Green having tight cashflow and breaching banking covenants since December 2004.

The liquidity crisis resulted in the directors halting production in August and placing the company into administration soon after.

Details of the investment proposals are revealed in an instructive report by the administrator into the reasons behind the failure of the iconic 83-year-old business.

One of the biggest issues identified by Ferrier Hodgson partner Martin Jones was the failure of the Green family to let go of the business despite having implemented a new corporate structure in 2003.

The new structure included appointing a majority of external directors and recruiting new managers with wider expertise.

However, “the decision making capability of the board as a whole was still an issue, with items identified as key to the businesses success, such as refinancing/equity proposals, being unresolved or continually deferred.”

The report added that the family shareholders were reluctant to allow other investors to acquire equity in the business, or to invest further equity themselves.

The administrators are currently in the process of trying to sell the business.

They have received three conditional bids, including one from Elders, and are working to finalise a sale.

Members of the Green family, including Alan Green and Harry Bakker, have proposed a scheme of arrangement and are still hopeful of regaining control of the business.

The administrators report said another problem with the company was its “change resistant culture and a reluctance to embrace new business processes and management disciplines”.

It noted that EG Green last reported a profit in 2002, even though its total revenue grew strongly to $211 million in the 2005 financial year.

The higher revenue reflected a strategic decision to grow the business, but this strategy created its own problems, including reduced margins and more complexity.

In particular, the higher throughput exacerbated bottlenecks in the plant, such as in the boning room.

Also, the processing of grain-fed cattle for export markets “lead to numerous production issues, customer complaints and wrong

products being produced and sold”.

The implementation of a new computer system added to the problems facing the group in 2005.

Significant delays were encountered during implemen-tation. More seriously, the new system was unable to produce timely financial and management information during the June quarter.

Further reporting problems flowed from the “growing disconnect” between the finance team, aligned with new managing director Mark Hughes, and the production team and previous management, led by long-serving chief executive Garry Minton.

This “management rift” resulted in financial and production results being sourced from different sets of data; for instance the production staff continued using the old spreadsheet systems.

The end result was two different sets of results and uncertainty as to the true position.

An ongoing problem area was inventory management. This led to issues such as double handling of product, customers being sent the wrong product and storage of obsolete stock.

Another issue was high staff costs, flowing in part from the company’s history of paying its staff well.

Staff costs increased to an “unsustainable” level after the board of directors was expanded and more middle managers were appointed. Finally, the company was affected by the drought in eastern Australia in 2003, which led to increased kill rates in other states, an oversupply of meat and falling prices in 2003 and 2004.