FURNITURE and appliances retailer Harvey Norman has defended its decision to diversify into dairy farming and cattle breeding, telling shareholders it is confident a $34 million investment in one of Australia's largest dairy farms will deliver returns.
The retailer faced a backlash from investors after revealing on Wednesday it had acquired a 49.9 per cent stake in dairy operator and cattle breeder Coomboona Holdings for about $25 million and had advanced about $9 million to the company.
Coomboona owns land and farm assets including dairy farms in the Coomboona district of the Goulburn Valley region in northern Victoria. It also operates a pedigree breeding and genetics business and is well known for its Holsteins.
"It just seems weird," said Australian Shareholders Association spokesman Allan Goldin as Harvey Norman shares fell 16¢ to $4.15.
"This a retailer of appliances and homewares – what are they doing buying a dairy farm?"
Harvey Norman's executive chairman and largest shareholder, Gerry Harvey, owns Australia's largest Thoroughbred sales company, Magic Millions, and has interests in beef cattle.
However, it is the first time his publicly listed company has invested in the agriculture sector and the Coomboona acquisition represents a significant investment outside Harvey Norman's core businesses of retail and property.
To outsiders, the deal also looked like a related party transaction. The Australian Financial Review first reported in June that Mr Harvey was eyeing an $80 million investment in the Coomboona Holsteins operation.
According to ASIC documents, Mr Harvey registered the name Coomboona Holdings Pty Ltd in November 2014, with Harvey Norman listed as the ultimate holding company.
In December 2014, Mr Harvey changed the Coomboona Holdings company name to HNM Galaxy Pty Ltd.
Mr Harvey was unavailable for comment, but company secretary Chris Mentis told the Australian Shareholders Association that the stake had not been acquired from Mr Harvey.
"The board met and had a good look at it and decided they could get a good return on this asset and it would be earnings per share accretive," said ASA monitor Nick Berry. "Even though it's outside their retail field they want to have shot at it."
Deutsche Bank analyst Michael Simotas said it was not the first time Harvey Norman had diversified into non-retail businesses and property holdings, citing previous investments in holiday resorts and mining accommodation.
"We cannot comment on the merits of this transaction given we have little visibility on the financials," said Mr Simotas.
"The outlay is small in the context of the broader group (about 3¢ per share) but we would rather see this capital returned to shareholders with franking attached," he said.
Mr Harvey is not the only billionaire investing in the dairy sector, hoping to tap booming Asian demand for Australian dairy products and infant formula.
Over the last year, Gina Rinehart has been buying dairy assets and land through her private company Hope Dairies. Late last year she announced plans to invest $500 million to produce baby formula for the Chinese market.
"It's not ideal but if you invest in Harvey Norman you have to be prepared for this sort of thing," said another analyst, who declined to be named.
Mr Berry is willing to give the retailer the benefit of the doubt, especially after a 27 per cent increase in net profit in 2015 and a 29 per cent share price surge this year. "Stranger things have happened," he said.
