Margin call on Fonterra

By LIAM DANN


Peter Margin, boss of Fonterra's Australian takeover target National Foods, has bought himself a fight.

But the big man with the Australian Broadcasting Corporation voice seems determined not to let his emotional attachment to the company - which he has helped to rebuild over the past eight years - affect his response to the New Zealand dairy giant's $1.5 billion unwelcome takeover bid.

But there is no doubt that the passion is there. "I love the company," he admits, when pushed. "But this is a value issue. We wouldn't stand in the way if it delivered that."

This week at the National Foods annual meeting in Sydney, he calmly rallied hundreds of pensioner-shareholders to his cause.

"Short-term capital gain: I do not want it," shouted shareholders who rose from their seats to congratulate the board for their defiance.

Margin's dogged air of professional calm also contrasts dramatically with the picture he paints of the Australian dairy industry.

It is a battleground where, despite several failed attempts, consolidation remains inevitable in the next two or three years.

Fonterra's A$5.45 a share bid "doesn't deliver the kind of rationalisation we need", he says.

The implication is clear: if Fonterra does get control of National Foods then it will need to get ready to move again in Australia, quickly.

The three big dairy players in Australia are National Foods, Dairy Farmers and Parmalat. There are destined to be just two, says Margin, a former food technologist.

"In Australia today there is surplus capacity in the fresh [milk] market," he says. "What is needed is a collapsing down of manufacturing. There is huge value to be unlocked when that happens."

Margin's point is this: if shareholders sell to Fonterra now they won't get to share the savings that come from mergers.

He won't be drawn on a number he thinks is fair compensation for this missed opportunity. But National Foods has produced a graph showing that recent Australian takeovers have been achieved with prices that offer a premium of 25 per cent to 35 per cent over the pre-bid share price.

Given the synergies that National Foods offers Fonterra, the premium ought to be near the top of that range, he says.

Fonterra's offer - A$5.45 a share - offers a premium closer to 20 per cent.

Using Margin's logic, it would need to be offering closer to A$6 to win the approval of the board.

In the first days of the takeover, the markets were excited about a bidding war for National Foods and the share price rose as high as A$5.80.

That has eased back as prospects of a rival bid dwindle.

Margin said comments he made that National had been talking to Burns Philp, owned by New Zealander Graeme Hart, were taken out of context and over-played.

"We don't see a white knight coming over the horizon," he says. "It's not a case of looking for a white knight at all. We have a great business as it stands today."

Margin presents a picture of National Foods as a company which has just finished the hard yards of restructuring and is about to embark on a golden age of product launches and double-digit profit growth.

Fonterra has clearly crashed the party.

Its bid could turn out to be a well-timed test of investor patience. If shareholders believe Margin, they will stick with National. If they are tired of waiting, they will take the cash.

"It's obviously a little frustrating from a management point of view," Margin admits, before again emphasising that he is focused only on what is best for shareholders.

About 12 months ago, Margin and his team decided to give up on geographic expansion and lower exposure to risk by diversifying away from the dairy business. It bought a soy milk business - something Fonterra finds distasteful. ("We don't actually consider that milk," said Fonterra's director of strategy and growth, Graham Stuart.)

Then there are the merger talks with canned fruit business SPC Ardmona. Fonterra found that possibility so unpalatable that it launched the takeover bid.

Margin says Fonterra is just not looking hard enough for the cost savings from the SPC deal.

SPC met every one of the acquisition criteria the company had set for itself.

It is a branded food business with an Australasian focus. It is the market leader in significant product categories and there are opportunities to leverage the capabilities of both businesses and extract tangible benefits.

The company has a long list of new products ready to launch in the next six months, Margin says.

It also has plans for a sizeable expansion into New Zealand - where it plans to become a bigger competitor for Fonterra in its home market.

It will launch its successful Big M flavoured milk brand and expand its specialty cheese and fish brands here in the next year.

"New Zealand is a small part of our business today, worth about $50 million," Margin says. "But there is no reason we couldn't take the sort of footprint we have in Australia and apply it to New Zealand."

Despite the rhetoric, Margin is not about to let the scrap get personal.

He claims to have a great deal of respect for Fonterra chief executive Andrew Ferrier. The two are both in their mid-40s and Margin, like Ferrier, took on the top job in July last year.

Margin had spent several years with National Foods and was groomed for the top role with a long stint as chief operating officer.

"The reality with both Andrew and myself is that we would never make it personal."

The pair's friendship makes sense for shareholders, he says.

"I've met him a couple of times ... it's early days but he seems to be doing a pretty good job."

Whether it is personal style or he has one eye on keeping his job if Fonterra wins, it's hard to say.

On Thursday, Margin was asked at a press conference about a public gaffe Ferrier was reported to have made. He tactfully suggested that Ferrier, who seemingly ruled out Fonterra lifting its bid, potentially in breach of ASX rules, may have been misquoted.

Margin almost certainly knew Ferrier had made a gaffe, but he was not about to rub it in, publicly at least.

The next step in the takeover process is for National Foods to respond to the formal offer document, which Fonterra delivered on Thursday. In a New Zealand takeover it would be normal to submit an independent valuation with that response.

Margin says National Foods is talking to valuers but has not yet decided if a formal valuation is necessary.

"Given the potential restructuring of this industry we've done a lot of work on value in the past few years. We're very sure about the valuation of the business."

Now it is for investors to decide.


National Foods

Describes itself as the only "truly national market milk company in Australia". Its Pura brand of milk is manufactured and sold in every state.

The company is the market leader in fresh milk and dairy foods. It manufactures yoghurt under the Yoplait brand.

National Foods was created in 1991 by amalgamating several dairy and food companies with histories that date back to the 1800s.

It is a listed company with annual revenue of more than A$1 billion. It is forecasting a profit of A$78 million for the 2005 year.