Facing fierce opposition from shareholders, farmers, lawmakers, and most other Farm Credit System lenders, Farm Credit Services of America has terminated its agreement to sell itself to Rabobank Group.
The $8 billion-asset government-sponsored lender also announced Thursday that it had rejected an offer from another Farm Credit lender, the $3 billion-asset AgStar Financial Services ACA of Mankato, Minn.
The sale to Rabobank, announced July 30, would have been the first ever in which a private-sector company acquired a government-sponsored enterprise.
Farm Credit Services, of Omaha, said in a press release Thursday that the structure of the deal, public comments opposing it, and the regulatory process all played roles in the decision to call it off.
The termination ended a nearly three-month saga that riveted the agricultural lending community. One observer called the deal "the biggest story in agricultural lending in the last 25 years."
While Rabobank, a Dutch company with $500 billion of assets, maintained that the deal would give borrowers in Farm Credit Services' four-state territory more options for financial services, farmers' main concern was the future of available credit.
The Farm Credit System was created in 1916 to be a lender of last resort for farmers who do not qualify for traditional bank credit. It is made up of 102 cooperatively owned institutions, and the farmers who own them do not want to see the system break up, because they regard it as their best guarantee of credit availability in good times and bad.
Within a week of the deal's announcement Sens. Thomas Daschle and Tim Johnson, both Democrats from South Dakota, were calling for public hearings to review its effect on rural lending.
Rep. Frank Lucas, R-Okla., held a hearing in his House Agriculture subcommittee Sept. 29 on the future of the Farm Credit System. Though the Rabobank deal was not the stated purpose of the hearing, it was the main topic of discussion. The packed hearing was held a day after Sen. Daschle introduced a bill in the Senate that would force any Farm Credit lender to wait six months before leaving the system.
Bert Heemskerk, the chairman of Rabobank's executive board, was not available for comment on Thursday's announcement, but he said in interview this month that he expects the Farm Credit System to eventually be privatized.
The way Mr. Heemskerk sees it, governments around the world will gradually phase out farm subsidies over the next two decades as part of free-trade agreements that require them to have their farmers compete on a level playing field with those in other countries. And as governments move away from subsidies, they will also move away from supporting farm lenders, he said.
"One day, the system will open" to acquisition by private companies, Mr. Heemskerk said. "We are dead sure of it."
He pointed to Rabobank's acquisitions of other government lenders in Australia, Ireland, and Canada as evidence of the trend.
Rabobank was attracted to Farm Credit Services' because of its location in the Midwest, Mr. Heemskerk said. "This is a very nice distribution network in the Midwest, which happens to be the main area of agriculture in the United States, so all that, from a strategic perspective, very much makes sense."
But some Farm Credit Services shareholders were not sure the deal made sense for them, especially in light of an $800 million fee that would have to be paid into the Farm Credit Insurance fund before the lender could leave the system.
Farmers for Farm Credit, a shareholder organization opposed to the Rabobank sale, said the $600 million price was not enough. The group hired Emmer Associates Inc., a Centennial, Colo., consulting firm, to evaluate Farm Credit Services and offer an opinion on what would be a fair price.
Emmer's report, released this month, valued Farm Credit Services at $1.8 billion and said that a buyer from outside the system should pay shareholders the exit fee in addition to the asking price. The report concluded that $2.7 billion would be a fair price.
Even before the report came out, Rabobank had raised its offer to $750 million to show its commitment to getting the deal done, but it was not enough to persuade Farm Credit Services' board. In its release Thursday, Farm Credit Services said it did not agree to Rabobank's request that the price increase be allocated equally among all shareholders. The original price was to be allocated on a patronage basis, determined by how much borrowing each shareholder had done with Farm Credit Services.
Its objection to the AgStar offer was that the combined entity would have "one of the weakest capital positions in the Farm Credit System, potentially jeopardizing the company's ability to stay with customers during the adverse cycles inherent in the agriculture economy," according to the press release.
Farm Credit Services also announced that its board had approved a patronage plan to distribute $55 million early next year to its shareholders according to their loan and lease balances outstanding. It also plans to pay an annual distribution to its shareholders from now on.
Cor Broekhuyse, Rabobank's regional head for the Americas, said that it planned to continue to grow in the United States and that it would look for other acquisitions and continue to invest in the businesses it already owns.
It has been lending to large U.S. agribusiness companies for over 20 years, but it began to develop a retail operation in 2002 with its acquisition of Valley Independent Bank in El Centro, Calif. Last year Rabobank bought Lend Lease Agri-Business, a farm real estate finance company in St. Louis, and Ag Services of America Inc. of Cedar Falls, Iowa.
"If we see opportunities to buy in California or elsewhere in the country, we will do so," Mr. Broekhuyse said.
