Optimists bank on mega co-op soon

By PHILIPPA STEVENSON

agricultural editor

Optimists in the dairy industry believe the crucial merger between Kiwi Dairies and New Zealand Dairy Group will be agreed within 10 days, after the decision dropped squarely into farmers' hands yesterday.

The Kiwi and Dairy Group chairmen, John Young and Henry Van Der Heyden, have admitted reaching another stalemate in the protracted talks.

In a joint statement, they said they had reached their final positions and were unable to agree on valuations for the companies.

But no one in the industry spoken to by the Business Herald believes the mega co-op is a dead duck and both leaders also signalled that more negotiations were possible.

Mr Van Der Heyden told a farmers' meeting that the door was still open to Kiwi. In a newsletter to his suppliers, Mr Young said: "This is not the end of the process."

One optimistic insider predicted that merger terms would be agreed within 10 days. Dairy Farmers of NZ chairman Charlie Pedersen said he was "pretty positive about our ability to get it together," while Dairy Board chairman Graham Fraser suggested new tactics.

In meetings over the next week, both companies are consulting their shareholders. "I believe Kiwi suppliers want MergeCo just as much as Dairy Group suppliers do," Mr Pedersen said.

The stumbling block to immediate resolution is price. Each company thinks it is worth more than the other and is demanding compensation.

Yesterday, at a three-hour meeting in Hamilton, nearly 300 Dairy Group suppliers supported their company's decision to walk away from talks after Kiwi refused a merger deal in which it would have paid Dairy Group farmers 40c a kilogram of milksolids, about $212 million.

Mr Van Der Heyden told the meeting that the company had "prostituted" itself to lower the offer from the $1 a kilogram that it believed it was worth more than Kiwi. On 1998-99 production of about 532 million kilograms of milksolids that equates to $532 million.

In the newsletter going to Kiwi suppliers today, Mr Young said Kiwi assessed its value as 80c to $1.40 a kilogram of milksolids more than Dairy Group.

On 1998-98 production of 386 million kilograms, that is $294 million to $515 million.

Both companies believe they will beat each other in future payouts and while Kiwi has offered to merge without any money changing hands, Dairy Group has hung out for the 40c differential for its farmers.

After the Dairy Group meeting, Waikato farmer Kevin Wooding said shareholders believed their company's offer was generous and had almost unanimously supported the directors' stance.

Farmers were disappointed at the stalemate because they believed the mega co-op was the best option for the industry, especially as they had also been told at the meeting that a merged industry could achieve gains of $300 million a year. That equated to an extra 20c a kilogram, or about $10,000 a year to the average farmer.

"Farmers are not going to accept 20c being left on the table but they are not going to give away 40c to pick up 20c," Mr Wooding said.

Underscoring the gulf between the firms, a Kiwi supplier laid responsibility back at Dairy Group's door. Any differential was a wrong move, said a Taranaki farmer who declined to be named.

"We've got to have a big company in which there are equal shareholders, not one-sided."

He suggested a different strategy, most likely an independent analyst whose company valuations could be accepted by the rivals.

The call was reiterated by Mr Fraser.

"The companies have failed to agree on valuations," he said.

"Obviously they can't both be right. An independent valuation could establish the facts and break this logjam."

The latest breakdown came as management consultancy PA Consulting Group released the findings of a study into the Australasian dairy industry that urged both countries to consolidate in order to remain competitive in the global market.

Kiwi chief executive Craig Norgate endorsed the thrust of the study.

"If we believe that in 10 years' time Australia and New Zealand companies can be competing with each other and still hold a place in the world in added-value business, then we're dreaming," he said.

"This mega co-op thing is not the end. It's just the start and people need to remember that."