Richard Inder: Fumble from Fonterra

COMMENT

Fonterra's failed bid to merge its rural services group, RD1, with rival Wrightson has worrying parallels with its still nascent bid to build a dominant position in Australia.

This week, the dairy giant admitted a merger was off the agenda when it sold its remaining 8.4 per cent stake in Wrightson, now controlled by former Fonterra chief Craig Norgate.

Fonterra, which acquired its original 19.6 per cent Wrightson stake in 2001 for just under $28 million, was recently close to merging the group with RD1. But Norgate's takeover put an end to those ambitions.

Fonterra has not done badly out of the deal. It bought the original holding for $1 a share and sold most to Norgate for $1.65. This week's tranche changed hands at $1.42, giving Fonterra a total $15 million profit.

But that is not the point. Fonterra could have pocketed much more if it had merged its operations with Wrightson and made the savings Norgate appears to be making. (Anecdotal investor sentiment towards Norgate is so far supportive of his actions.)

Fonterra has a 17 per cent stake in National Foods, Australia's largest listed dairy company. It has also made no secret of its ambition to consolidate the Australian dairy industry.

Indeed, in December last year, the dairy giant's Canadian boss, Andrew Ferrier, promised an aggressive international expansion.

But there's been little concrete evidence of action.

Now New Zealand's richest man, Graeme Hart, fresh from selling a $2.1 billion chunk of his international food business, looks as if he is lining up a move on the transtasman dairy market.

Just as Norgate moved on Wrightson and left Fonterra out in the cold, Hart may move on National Foods. If successful, he could deprive Fonterra of the necessary scale and brands it needs to maintain its position as a world player.

So the question must be asked: is Fonterra dragging its feet?

Three further points lend weight to the view that it is. First, eight months have passed since Ferrier moved finance chief Graham Stuart into his new - and important - role of strategy director. Yet he still has not found a permanent replacement to mind the company's books.

At the same time, the protracted negotiations to establish a presence in China continue, as does the group's long-running battle to take control of its Chilean venture, Soprole.

To be fair, it is still early days for Ferrier, who has not been in the job a year. Fonterra is also a huge organisation and of vital importance to the New Zealand economy. A rapid string of international deals would be equally worrying.

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The Government's backing of Genesis Energy's new $520 million power station at Huntly is a step backward for the already badly organised energy market.

The existing problems have been well canvassed: the dominance of state-owned generators, the complexity of the spot electricity market and the lack of a liquid forward market.

The still undisclosed debt guarantee to Genesis, however, undermines the most important attribute of any healthy market - confidence that all will be treated fairly.

If the state-owned operators get privileged and - more to the point - unpredictable access to capital, private investors will back away.

Finance Minister Michael Cullen says the Government's debt guarantee is the pragmatic response. He said it "reflected the Government's foremost responsibility to ensure new generation is built in a timely way".

That's not without merit.

The Maui gas field is dwindling and no clear replacement has been found. Unless power prices rocketed, only the brave would invest more than $500 million without a guaranteed fuel supply.

A big gas find would undoubtedly spur a flurry of investment in energy generation, but there exists a real prospect of a mismatch between electricity supply and demand.

Cullen has put in taxpayer cash to ensure New Zealand can take advantage of the new discoveries of natural gas. He should make the justification for his move transparent. At the least, that would help investors to judge if more handouts are likely.