Cheers end dairy merger pain

By PHILIPPA STEVENSON agricultural editor

Thursday's announcement of a merger plan for New Zealand's dairy industry probably sparked cheering in the 120 countries where thousands of people are at the sharp end of the market for our butter and cheese products.

The protracted negotiations between New Zealand Dairy Group and Kiwi Dairies, which were the prelude to the agreement may have been frustrating for the shareholders of the two groups.

But for Dairy Board staff selling the products overseas it's been an almost painful process.

Fort Lauderdale-based Scott Eglinton, managing director of the $US700 million ($1.6 billion) consumer business NZ Milk, said yesterday: "We were starting to see signs things were not going as well as they could."

His company makes 40 per cent of NZ milk's global revenue and operates throughout the Americas.

He said the merging of the companies was the best outcome he could have hoped for.

"We'd started to notice delays in development.

"We noticed the two companies looking at each other instead of at what the market wanted, and there were creeping incidents of quality, of the companies not responding as quickly as they normally would."

"Product orders would go back and forth between the companies and the board.

"This [merger] takes out a layer of effort that has been replicated."

The chief of NZ Milk South East Asia, Mark Wynne, greeted the news of the merger with: "Great, it's years overdue."

The company he manages has a turnover of $US320 million.

He said, most, if not all, of the 10,000 people in the board's international network, had been waiting for the development for "quite some time."

"It brings three key things. Total alignment, speed, and an absolute focus on priorities.

"They are the things needed to compete against the likes of Nestle, Kraft and Danone. The world's not waiting for us."

He said it was logical for manufacturing and marketing to be in the same unit.

"If you imagine how we try and develop new products or get innovation to the market - one part comes up with the ideas, and the other gets them made.

"When you are all in the same room, looking at the same objective, it makes things a lot easier and smoother."

In Wellington, board chief executive Warren Larsen, shared the sentiments flowing from the board's commercial empire.

He said that while the companies were grappling with the complexities of the merger and negotiating the welter of legislative changes with the Government, it would be "business as usual," at the board.

"But at the same time, we will be doing everything we can to facilitate the bringing together of the merger.

"We are very pleased with this development and want to help wherever we can."

He said the board's customers should respond very positively.

"They will prefer to have the same continuity of supply and long term commitment to the business they've enjoyed over many years.

"Having a single, major commercial entity carrying on the work will give them a sense of comfort.

"They can buy in other parts of the world as well, and they would prefer to have an integrated entity here that's going to be in the business in the long- haul, taking care of their supply requirements."

The mega co-op plan was launched a year ago with the goal of raising turnover from $7 billion to $30 billion in 10 years.

That was greeted with some skepticism, but Mr Larsen - who will leave the job in May just as the new company comes into existence - is confident the target can be met, if not beaten.

This year's revenue, assisted by the exchange rate, will be close to $9.5 billion.

"So $30 billion doesn't look anywhere near as far away as it did," he said.

The new company, temporarily called Global Dairy, wants to be bigger, bolder and more profitable than anything New Zealand has ever produced.

It is already the country's biggest exporter, accounting for around 25 per cent of export receipts.

Andrew Grant of McKinsey and Co, the international company which produced the target figures, believes the merger agreement has put the industry on track for greatness.

"We applaud the industry leaders." He said countries New Zealand should look to as examples, such as Finland and Ireland, all had one really significant flag carrier.

"Ireland's got building materials company CRH, Finland has Nokia, Singapore has Singapore Airlines, and we've missed it.

"I think it [the new company] is incredibly important to the nation in that sense.

"It does have the potential to be a Nokia, but let's not walk before we run."

The man tipped to head the merged group, Kiwi Dairies chief executive Craig Norgate, says the plan is New Zealand's one chance of having a world-scale business.

He believes it will be achievable with just a little help from the legislators.

"You can directly draw parallels with Finland and Nokia, and now in Scandinavia with Arla Foods."

The comparison with Arla, the world's sixth biggest dairy company, is particularly appropriate, he believes.

"The Danish dairy industry, in very similar circumstances, for years resisted a merger between [co-operatives] MD Foods and Klover.

"Then when the Government took a pan-European view of the market and permitted the merger they very quickly merged, and then with Arla in Sweden."

That created a very strong co-operative spanning Sweden and Denmark and put the dairy industry in safe hands for a very long time.

He hopes the Government will take the same broad view for a company that sells only 4 per cent of its milk production at home and the rest on the world market.

He rejects the accusation that the dairy industry wants to play by different rules to other business.

"We're actually saying that we need to go further than the current framework allows. The Commerce Commission can't do that. The Government can.

"We are not being naive about those competition issues.

"We are saying that the best advice we have got says that we need to go further than what's permitted in terms of the light-handed regulation.

"So we're offering a solution to the Government to facilitate an orderly transition from current statute."

The two companies' farmer shareholders, although keen for the merger, also need to be convinced that they are being offering a good deal.

"They're prepared to acknowledge the big picture, that it's the right thing to do," Mr Norgate said.

"But we've got to now satisfy them on the detail. A vote of 75 per cent is a high threshold. But we've got to aim higher than that, because if we've got a quarter of farmers unhappy with us, then we're going to have a hard road to make them happy afterwards."

The merger has all been about getting to the starting line, he said.

"All we've been through, and it's just the end of the beginning.

"We just want to get through to the other side of this process very quickly and unleash all the energy this industry's got, and make sure we realise its full potential."