Between the lines - Credibility of merger milked to limits

By PHILIPPA STEVENSON

There is one thing more chilling than the latest stalemate in merger talks between the Kiwi and Dairy Group companies.

It is the fact that both companies have suggested somewhat seriously that the fallback position of two integrated manufacturing and marketing companies is a viable option.

Truth seems to be in short supply in the dairy industry and that is the biggest porky yet.

Few people within or outside the industry believe that a failure to reach agreement on the relative values of the companies is the sole reason for the collapse of their merger negotiations. Any one of numerous valuers could crunch the numbers to the companies' mutual satisfaction and bridge the impasse if that was all there was to it.

There may be slightly more people who think the go-it-alone Plan B of Kiwi and Operation Eagle of Dairy Group could fly. But the chances are they have not been paying attention.

As the dairy industry's own executives sell the advantages of the mega co-op, by default they have been revealing today's costly and cumbersome practices in which the manufacturing tail wags the marketing dog.

Long-time industry consultant Professor Wayne Cartwright says there is no plan B worth a darn.

The McKinsey consultant's report, which gave rise to the mega co-op strategy, has not been seen by many but is understood to run the two-company scenario as a considerably worse option than the single company frontrunner.

A report by PA Consulting Group, having been commissioned for the consultancy's own edification and to raise its chances of dairy industry contracts, is getting slightly greater circulation.

The report makes frightening reading as it details the threats of inevitable further supermarket consolidation and a consequent lift in purchasing power, reducing costs and rising production in competing countries, continually falling commodity prices, and the real possibility of milk substitutes from crops.

Unavoidably, the conclusion is drawn that the only chance - and it is only a chance - to combat such risks is for the New Zealand industry to integrate very quickly, and to barely pause for breath before looking around for new partners to increase its size.

Kiwi and Dairy Group's power and separate agendas have been tearing the Dairy Board apart. The mega co-op was the industry's agreed answer to the problem. A failure to merge will exacerbate that problem and cause many more.

The world's dairy players are marching on while New Zealand squanders its traditional advantages and dithers over opportunities.

Since the mega co-op idea was advanced five years ago the only thing to have changed is its urgency - greater now than ever.