Booklets sign of dairy merger progress

By PHILIPPA STEVENSON and NZPA

Global Dairy Company's distribution to farmers of booklets detailing the proposed mega co-op signals that there has been progress on talks with Government officials.

Before the plans went to farmers last week, GlobalCo project director Graham Stuart had said that discussions with the officials had delayed the issuing of the information.

"When the Government shows sufficient confidence [in the plan] and will support the package, it will go out to shareholders," he said.

Kiwi Dairies chief executive Craig Norgate said on Friday, after the six booklets explaining how the company would operate had gone to farmers, that there were unlikely to be further material changes.

"We've made a number of changes over the last few weeks. We have been trying to get it as close as possible to what it may look like to make sure we don't send stuff out to farmers that we then have to fundamentally change."

Mr Norgate said it was too early to comment on the likelihood of the proposed merger between Kiwi and New Zealand Dairy Group going before the Commerce Commission.

"We've still got to have further discussions with Government. Our position hasn't changed but we haven't had the nod yet," he said.

GlobalCo has argued that the Government, not the commission, is best placed to consider all aspects of the mega co-op.

Mr Norgate said the suggested June 1 start date for GlobalCo was still achievable.

"We never expected to have legislation through the House that quickly but at this stage it looks as though our original timetable is still sensible."

However, a new chief executive for the company is now unlikely to be named until the end of the month. The position was to have been filled by the end of March.

The search has gone worldwide but the frontrunners are thought to be Chris Moller, general manager of Dairy Board company NZMP, and Mr Norgate.

The merger still requires support from farmers, who will have to approve with a 75 per cent majority their individual companies' participation. The vote is next month.

Meanwhile, the booklets show that Dairy Group's plan to sell "peak rights" to farmers who want to boost milk production during the 71-day dairy season peak looks set to be dumped in the transition to the mega co-op.

Instead, farmers will get "capacity notes," at a cost of $30 each.

Under GlobalCo, the capacity notes would be required according to a formula based on "standardised litres."

A farmer supplying 731,712 litres of milk a year - or 60,000kg of milksolids - with a relatively low daily supply at the peak of the season of 3552 litres would have to buy 1584 capacity notes, at a cost of $47,550. An "average" farmer producing the same total milk, but 3935 litres at the peak, would have to pay $59,010, and the same farmer with a peak supply of 4408 litres would pay $73,230.

The capacity notes, which would remain fixed at $30 a litre until the end of the 2003-2004 season, are to help meet the costs of providing processing capacity for the height of the season.

But the new company, including the Dairy Board and effectively producing more than 20 per cent of the nation's export revenue, has adopted Kiwi's proposals for a "fair value" share standard, and creation of tradeable capital notes.

The capital notes would be paid out to farmers instead of cash when they sold their company shares. The notes were expected to be exchangeable for cash in a secondary market on the Stock Exchange.

They would help to protect the company from being bled dry when paying out farmers cashing in their shares.

When the industry deregulates, big suppliers producing 250,000kg of milksolids could immediately cash in up to $1 million worth of shares and then transfer their allegiance - and their milk supply - to a new company, such as a big multinational.

Therefore, the entitlement to supply milk will be at a price that reflects value of returns from investments such as brands or intellectual property.

An independent value would indicate a fair value range - such as $3.80 to $4.20 - in August each year. Company directors would set the actual value by the start of the new season the following June.

As the new company creates wealth that is not reflected in milk payouts - for instance income from intellectual property such as patents on technical advances - the value of its shares should rise, independently of milk production.

So, when existing suppliers or farmers new to the company wanted to increase supply, the extra shares they would be required to buy would be priced at the current value.

The share standard would determine not only the payment a farmer would have to make for extra milk, but the price farmers get for their shares when selling.

And instead of cash, those farmers would surrender their shares for capital notes, the market value of which would fluctuate.