Tafe and Agco: How did the tractor partners fall out of love?

Growing anxiety over Tractors and Farm Equipment Ltd's (Tafe) rising ownership in Agco Corp., plus its demand for board-level changes at the US-based tractor maker, prompted the latter to snap its brand agreement with the Chennai-based company, according to Tafe's court filings, as well as a senior company executive.

After discontinuing some business ties with Tafe earlier this year, Agco on 30 September terminated its agreement that allowed Tafe to sell tractors under the Massey Ferguson brand, accusing the Indian company of what it called inappropriate and unauthorized actions. The developments come as a possible case of shareholder activism by a homegrown entity rattling a large foreign company.

Two reasons

“The Tafe-Agco matter has been triggered by two fundamental reasons. One, as you said citing legal documents, is perhaps because the executive (Agco CEO EricHansotia) was concerned about the rising ownership of Tafe in Agco," said T.R. Kesavan, group president, corporate relations and alliances, Tafe.

Tafe first acquired a 12.5% stake in Agco in 2012, a year after Tafe chairman and managing director Mallika Srinivasan joined the board of the US company. Tafe has since increased its stake in Agco, touching 16.31% at the end ofSeptember2024, making it the single-largest shareholder in the world's third-largest tractor maker.

Also read |  TAFE presses AGCO to refresh board, consider alternatives

Tafe's submission to a Chennai court on 8 August said, “As between 2014-2024, the shareholding of the first plaintiff (Tafe) in the second defendant (Agco Corp) had risen to 16.3% and since the first plaintiff had become the single largest shareholder, the same had made the second defendant uncomfortable. Therefore, to force the plaintiff to a standstill agreement and to reduce its stake in the second defendant, without any justification whatsoever, the defendants issued a letter, dated 26.04.2024, unilaterally terminating the agreement between the parties concerning Turkey".

Another angle

Kesavan provided another angle to the issue.

“But the other equally important reason is that the largest shareholder, Tafe, has been urging Agco for a few years now that Agco should split the role of chairman and CEO. Tafe is the largest shareholder, a long-term strategic shareholder, a patient investor whose interests are completely aligned with those of other shareholders," said Kesavan.

On the question of whether Tafe would like to increase its stake in Agco, which had a market cap of $7.3 billion as of 4 October, Kesavan said Tafe has written to all shareholders, highlighting its concerns. However, he reiterated a standstill agreement limits Tafe from owning more shares in Agco. “Please remember Tafe has not sold a single share since we invested in Agco in 2012. The commercial matters are sub-judice as it is in court, and I am afraid I cannot comment on these," he said.

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An email sent to Agco on 1 October remained unanswered.

The roots of dispute date to 2022, a year after Hansotia became the chair and CEO of Agco in January 2021. Citing Hansotia's lack of experience running a large business, Srinivasan suggested to the Agco board that the roles of chair and CEO should be split some time in early 2022, a Tafe executive privy to the development said on the condition of anonymity.

In April this year, Agco ended some business relationships with Tafe, citing the company’s “continued poor operational performance as a supplier, brand licensee and distributor to Agco" and “continued lack of focus on Agco customers in several key markets". Finally, on 30 September, Agco said it was ending, with immediate effect, its agreement with Tafe that allowed the homegrown company to sell tractors under the Massey Ferguson brand.

This prompted a Tafe executive to write to Agco's shareholders, underlining what it said were strategic missteps, poor execution, and underperformance by the US company. Tafe also secured a reprieve from a court in Chennai, which put on hold the dissolution of the agreement between the two companies.

Call for changes

“Tafe calls for shareholder-driven boardroom changes, citing issues such as missed market opportunities, unsuccessful acquisitions, and ballooning costs," P. Krishnamurthy, corporate advisor to Tafe, said in a letter dated 30 September.

“Rather than engage constructively with Tafe, the board has taken measures to disenfranchise Tafe and isolate Tafe’s representative from meaningful boardroom involvement," the letter said.

Founded in 1990, Agco does not have a promoter and counts money managers Vanguard and Blackrock as its second and third largest shareholders, owning 10.5% and 7.1% respectively, as of 30 June. Its revenue improved 13.9% from the year-ago period to $14.41 billion in the year ended December 2023, while profit jumped 34.4% to $1.7 billion.

Also read |  Chennai court allows TAFE to continue with Massey Ferguson trademark use

For now, Srinivasan’s central demand for splitting the CEO and chair roles at Agco does not appear to have found much support from other shareholders. In April this year, 15 of the 20 largest public shareholders, who own 56% of Agco, voted to reappoint Hansotia as director.

Sole dissenter

The sole dissenter was Norway’s Norges Bank Investment Management, the world’s biggest sovereign wealth fund, which owns 0.91% of Agco, according to filings reviewed by Mint.

“The board should exercise objective judgment on corporate affairs and be able to make decisions independently of management. The roles of chairperson and CEO should not be held by the same individual," reasoned Norges, as it rejected the reappointment of Hansotia. “Where a company founder combines both roles, we may support this for a limited period, provided the board has put in place measures to mitigate any conflicts of interest."

Also read |  Massey Ferguson scraps 28-year partnership with TAFE over breach of agreements

Tafe was founded in 1961 by Srinivasan’s grandfather, Sivasailam Anantharamakrishnan, the founder of the Amalgamations Group. Privately held Tafe is the country’s second-largest tractor maker, behind leader Mahindra and Mahindra. In the year ended March 2023, it had ₹12,619 crore in revenue and ₹1,278 crore in profit.

Agco owns 20.7% of Tafe, while Simpson & Co Ltd, the holding company of the Amalgamations group, holds the remaining 79.3% of shares. An Agco executive, Robert Crain, is also on the Tafe board.