Lift-off looms for GlobalCo

By PHILIPPA STEVENSON

The dairy industry's five-year trek to form the Global Dairy Company is now in the home stretch.

It is nine weeks since farmers approved the key merger between New Zealand Dairy Group and Kiwi Dairies, and just six weeks until its expected launch.

Chairman John Roadley, in a typically upbeat address to an agribusiness conference, said GlobalCo planned to be in business - with a permanent name - before the end of next month.

"We are now less than six weeks away from the scheduled passage of the legislation required to complete our industry merger, deregulate our industry and form our new co-op."

He warned that while the industry was riding high on a record payout, GlobalCo would have its work cut out to repeat the level achieved last season.

"High international commodity prices and a low New Zealand dollar are not factors we want to depend on, and we have no intention of doing so. Our challenge is to take our industry to the next level of performance."

But those that held out against the mega merger, such as the Tatua and Westland dairy companies and other small firms, are concerned that GlobalCo's performance will be at their expense.

These smaller companies will be able to tackle export markets alone once the Dairy Board's export monopoly is abolished under GlobalCo's formation.

Former Federated Farmers president Malcolm Bailey, who has kept up his criticism of the GlobalCo concept despite now being a member of its shareholders council, has similar fears.

"Little Tatua, the company leading the payout stakes for a decade, was living proof that being big wasn't a prerequisite for success," he said in a submission on the Dairy Industry Restructuring Bill.

Mr Roadley, in defending GlobalCo's size, said there was a place in any industry for small, niche players such as Kapiti Cheese or Tatua, and that with export deregulation they would have an opportunity to build their businesses.

"If they say that they can outperform us in niche markets then good on them. But a customer like Wal-Mart is highly unlikely to be interested in dealing with a supplier that can't service it globally," he said.

Wal-Mart, the American chain predicted to have an annual turnover of more than $US1 trillion ($2.28 trillion) before the end of the decade, could eventually be one of only 10 major food retailers in the world.

"From the suppliers' point of view you must have scale to have any leverage with a customer as powerful as a Wal-Mart," said Mr Roadley.

"That reality is driving dairy companies to merge, to acquire and to enter into joint ventures with one another."

One early critic of the mega merger who has changed his view since the farmers' vote is Victoria University commerce dean Professor Neil Quigley.

In January, in a report to the Ministry of Agriculture, he said the disadvantages of the giant company outweighed any benefits to such a degree "that the proposal does not represent the best deal for New Zealand".

He urged the Government to ensure that GlobalCo went before the competition watchdog, the Commerce Commission.

Six months later, in a report jointly authored with economics professor Lewis Evans, entitled Watershed for New Zealand Dairy Industry, the two said mergers that required major deregulation were not necessarily best considered by the commission.

"Telecom was privatised after first being a state-owned enterprise and New Zealand Post's market was deregulated after it had time to develop as a business.

"In the same way, the creation of Global Dairy will allow full deregulation of dairy product exports to take place with minimal prospect of dislocation, while preserving the opportunity for Global Dairy to evolve over time in response to competitive forces."

Some work has started to capture the savings promised from a more integrated industry. While a lot has to wait for the merger to be formalised, milk collection has already started to be rationalised.

An example is Kiwi's Northland-based tanker fleet, which will collect all milk north of the Auckland Harbour Bridge. Dairy Group tankers previously covered this area.

Dairy Group's fleet will now pick up in the Taumarunui area, formerly covered by Kiwi.

In April, GlobalCo revised its business plan predicting annual benefits of $310 million, which it hoped to realise in its third year of operation, saying that they could climb to $332 million.

First-year savings are expected to be wiped out by the cost of setting up the company.

The company, which hopes to increase revenue from $10 billion to $30 billion within a decade, said the annual benefits from integration would be made up of cost savings of $120 million, revenue enhancements and productivity improvements of $70 million, strategy gains of up to $104 million and $38 million from Australasian rationalisation and expansion.

Meanwhile, Dairy Group has urged the parliamentary select committee considering the industry bill to change the proposed regulation that would allow suppliers to direct 20 per cent of their milk production to other processors.

"Competitive processors should compete on an equal footing, without permitting one to freeload on the financial strength of the other," the company said.

GlobalCo, Dairy Group and sharebrokers have also argued that the bill should give the company the right to enter the market for its funds-raising capital notes as insurance against manipulation.

Developments since farmers approved the dairy mega-merger on June 18:


July 4: Craig Norgate, the 36-year-old head of Kiwi Dairies, appointed GlobalCo chief executive.

July 18: Dairy Board executive Chris Moller named deputy chief executive, and managing director of ingredients business NZMP, which he also headed at the board.

The new-look NZMP, with $7 billion turnover, will comprise the Dairy Board's existing ingredients business as well as Anchor Products, Kiwi Dairy Products, Food Solutions Group and New Zealand Dairy Ingredients. It will also look after transport and milk quality, and the board's global division.

NZMP has been charged with delivering the benefits from integrating manufacturing and marketing.

July 20: GlobalCo effectively became the cornerstone shareholder of Wrightson when Dairy Group subsidiary RD1.com bought 19.9 per cent of the company. The Commerce Commission is investigating whether this will substantially reduce competition in the rural service stores sector.

July 20: Dairy Foods, the local market company to be divested under the merger, appointed investment bank ABN Amro to handle the sale.

July 24: Dairy Board executive David Pilkington appointed managing director of the consumer and food service business, New Zealand Milk, also the role he had at the board.

New Zealand Milk - turnover $5.3 billion - will consist of the board's existing consumer arm, plus Australasian Food Holdings, a company incorporating local dairy marketer Mainland and West Australian-based Peters and Brownes, owner of the Tip Top brand.

August 7: All but one of the 46 seats on the watchdog Shareholders' Council filled from 92 candidates. A second election has resolved a two-candidate deadlock in the Hauraki ward.

Also this month, GlobalCo confirmed it had reconsidered moving the bulk of Wellington-based Dairy Board staff to Auckland.