Dairy Foods eyes pastures new

By PHILIPPA STEVENSON

Fonterra outcast New Zealand Dairy Foods is on course to have new owners mid-year, earlier than expected.

It is a prospect that the business can only welcome. Dairy Foods' history of being milked of capital came to a head in the past 12 months in what was something of a year from hell for the South Auckland-based company.

Dairy Foods' brands include Anchor, Chesdale, Fernleaf and Fresh 'n' Fruity and the firm accounts for 40 per cent of the domestic dairy market.

Last year, it managed a profit of only $900,000 on turnover of $416 million.

The profit was down nearly $11 million on the previous year, mostly thanks to the higher price Dairy Foods had to pay for raw milk, reflecting the returns its supplier, Fonterra, was receiving as world commodity markets boomed.

There were other calamities.

Long delays in maintenance brought Machinery breakdowns, requiring a schedule of renovations and replacements that is continuing.

The spotlight went on a woeful environmental record dating back 10 years whose consequences the company is also still dealing with.

Its workers threatened to strike, fearing for their jobs under new ownership.

A listeria scare prompted a product recall, although products were later found free of anything harmful.

Price rises for retail milk made customers grumpy and brought the ire of the Consumers' Institute.

From such a nadir, things can only get better for a company which has to go it alone in the interests of a competitive local market.

That prospect, but also the investment beachhead that Dairy Foods represents in this corner of the burgeoning Australasian dairy market, is likely to have attracted prospective buyers.

The deadline for the sell-off is October, but chief executive Peter McClure said the sale process was going well and should be completed well before then.

ABN Amro director Greg Batkin, whose company is advising Dairy Foods' board on the sale, said there had been interest from overseas and within New Zealand. Several indicative bids were made last month.

The Great Milk Company, backed by dairy farmers, is the only party to openly acknowledge that it has made a bid, but Mr Batkin confirmed others had been received.

November's roadshow by Dairy Foods chiefs, who hawked their company to 25 businesses round Europe, the US, Japan and Australia, had brought a good response.

For most of its life, Dairy Foods was the wholly owned subsidiary of New Zealand Dairy Group, which has acknowledged in recent years that it siphoned profits from its domestic arm to prop up milk-supply payouts to farmers.

In 1999, half its shares in Dairy Foods went to around 5000 Dairy Group shareholders in the North Island as part of a merger deal Dairy Group struck with South Island Dairy Co-op.



When Fonterra was being formed, the Government required that the Dairy Group stake in Dairy Foods be sold. The industry has chosen to keep the other major local marketer, Mainland, as Fonterra's domestic subsidiary.

Tokoroa dairy farmer George Moss, a director of The Great Milk Company, said it lodged its underwritten preliminary bid on December 12. His company has been formed by many of Dairy Foods' farmer or B shareholders who are keen to own Dairy Foods outright.

Mr Moss said Great Milk had a partner as well as an underwriter but could not yet reveal either.

Mr McClure was confident that Dairy Foods will have a much better year this year, as he forecast at August's annual meeting.

The company has a major upgrade planned for its beverages plant in March, and is in the middle of substantial environmental work particularly related to stormwater at its Takinini site.



New, smaller competitors are emerging. Premium Milk has been around for up to 18 months and Tussock Milk, formed by Karaka farmer Julian West and an unnamed Rotorua property investor, is due to be launched this week.

From Thursday it intends selling milk in 12 Woolworths stores in Auckland, and aims to expand its distribution throughout the North Island, including home delivery.

Tussock spokesman Garry Belsham said the company intended starting by supplying about 6000 litres of milk a day and he expected that to build quickly to around 22,000 litres. The milk would come from Gisborne, and the company had 60,000 litres a day available to it.

Dairy Foods' production is around 600,000 litres a day.

Mr McClure said the appearance of smaller competitors was expected.

"I guess we are not overly concerned with the smaller operators, but we certainly don't take them lightly."

No more retail milk price rises were likely after last year's hikes, especially as there were indications of an easing in the international commodity market which "may take a bit of pressure off us, if anything," he said.

Retail price is a sensitive issue.

Consumers' Institute chief executive David Russell said last week that the high price of milk showed that the public was at the mercy of a dairy monopoly.

It was "the usual story" for consumers: New Zealanders had to pay overseas prices for milk, but when those prices fell, producers made excuses for keeping the cost up in New Zealand, he said.

"We are captured by the market. There is not the competition present at the producer level and we think this is very unhealthy and is reflected in the price we pay for a pint of milk."

Mr Russell doubted the situation would improve, even with the prospect of Dairy Foods' sale.

There was a real prospect of a duopoly with Mainland being created, although it was also possible that groups such as supermarket chains would band together to create competition.

Last year, Dairy Foods chairman John Storey said the $500 million company needed to become a $2 billion one to remain competitive. He acknowledged it would be a stretch but believed the goal was achievable.

Mr McClure told the Business Herald that although Dairy Foods' new owners would determine the company's strategy, there still appeared only one course to take.

"If you look at the New Zealand market place it is part of the Australasian market place, particularly in the grocery industry; so I think longer term, you have to be able to compete in an Australasian way or you risk being isolated."

While he was reluctant to comment on past decisions by the company's owners, he obviously hopes the years from hell are over.

"Put it this way: Dairy Group had clear priorities which didn't necessarily include New Zealand Dairy Foods and, as a result, investment in our assets was below where it should have been for a number of years," Mr McClure said.

"Hence the catch-up of the last couple of years which has made life pretty difficult for us.

"If we look ahead at our plan over the next five years, we've got a substantially higher level of maintenance capital than we ever had in the past.

"That's fundamental to maintaining the level and quality of assets we now have."