Mark Peart: Fonterra needs a magic wand

I'm picturing a scene in a boardroom in downtown Auckland. Senior executives of New Zealand's biggest company, and the world's largest dairy exporter, are huddled around an oak table.

These highly paid Fonterra executives, who make major commercial decisions every day, have taken time out from their busy schedules to brush up on their magic skills.

As a man with a long flowing cape and a white beard stands over them with a stopwatch, said executives are frantically trying to work out how to pull rabbits out of a hat.

After that, the image gets blurry.

I'm being liberal with the truth but, hopefully, you get the picture.

If the dairy giant can pull off a successful bid for National Foods, its equally monolithic Australian competitor, it will have been a remarkable act of sorcery. One that even the hard-to-please Professor Snape of Harry Potter fame would have to acknowledge.

But the pressure is definitely on. For as the facts present themselves, Fonterra faces an uphill battle to brush aside its rival suitor, Philippines-based brewing food and beverage group San Miguel.

And particularly when San Miguel is the preferred bidder and National Foods regards Fonterra's foray as downright hostile.

Leaping forward, I can't help wondering how long it would take for the New Zealanders to overcome that hostility to a point where it was wholly productive under new ownership.

Should Fonterra be successful, it is likely it will have been forced to pay a premium price for the privilege. The question then follows: to what degree will the brinkmanship have affected bottom-line payouts to Fonterra's farmer-shareholders, and will it have been worth it?

As we know, Fonterra has offered A$5.45 a share, or A$1.3 billion, for National Foods, but so far has been outbid by San Miguel's A$6 a share, A$1.8 billion counter-offer.

If Fonterra wants to raise its bid, it has until January 24 to do so. Independent Australian broker Austock is picking it to up the ante by 15 per cent to A$6.27 a share, but not for another two months.

In the meantime, the stakes get higher by the day. Last week Dairy Farmers of New Zealand chairman Kevin Wooding effectively told Dow Jones Fonterra should cut its losses, sell its stake, disburse the sale proceeds to shareholders and move on.

Wooding thus expressed publicly what many are thinking privately. Every dollar they put into National Foods is one less dollar that comes off the company's balance sheet.

It seems that Fonterra shareholders broadly support any initiative their directors and management might take to improve their farmgate returns. Why wouldn't they?

But as those at the senior echelons of the company will be aware, shareholder goodwill is a precious commodity, not to be abused, squandered, second-guessed, or taken for granted.

And while the only tangible way shareholders can vent their dissatisfaction if directors act contrary to what they perceive is their best interest is at the ballot, no board, particularly in the high-charged dairy industry, wants to alienate their base.

Wooding, who claims to represent more than half of Fonterra's shareholders, says farmers aren't necessarily opposed to the National Foods acquisition as the Australian company wouldn't form part of Fonterra's core business of selling NZ milk, he says.

Austock agribusiness analyst Paul Jensz says yoghurt holds the key to Fonterra's determination to prevail. It already has 82 per cent of the Australasian commodity dairy sales market and 50 per cent of the packaged dairy sales market.

But it lacks a presence in the high-growth yoghurt market or the Australian flavoured milk market. And without those, its desire to launch a global assault on a top three global dairy position will be hampered. Fonterra boss Andrew Ferrier and co are hopefully weighing up that and other issues related to the National Foods bid.

* Mark Peart is a Dunedin-based freelance writer.