Speculation heats up over mega-merger

By PHILIPPA STEVENSON agricultural editor

Expectation that dairy industry giants New Zealand Dairy Group and Kiwi Dairies will seal an agreement to merge within days has hit new heights.

Company leaders met Agriculture Minister Jim Sutton yesterday.

Mr Sutton would not comment on the talks with the chairman and chief executive of Dairy Group, Henry Van Der Heyden and John Spencer, and their Kiwi counterparts, Greg Gent and Craig Norgate.

But the meeting comes amid anticipation of the companies' announcing an agreement tomorrow. The four leaders are known to have been engaged in intense discussions in recent days after several months of meeting at least fortnightly. The Business Herald reported early last month that the key directors were having another serious attempt at the merger, after their first attempt came unstuck nine months ago.

Farmers reported Dairy Board chairman Graham Fraser telling them there could be a merger by Christmas, though Mr Fraser declined to comment.

And Kiwi director Murray Gough, a former Dairy Board chief executive, said he would not rule out a deal before Christmas because low-key but high-level talks had been going on for three or four months.

Since then, the companies, which both have in-house public relations staff, are known to have appointed an independent public relations company, Wellington's Sue Wood and Associates, especially to handle communications on a deal.

Yesterday, Federated Farmers dairy leader Charlie Pedersen confirmed he expected a decision tomorrow. Farmers "absolutely" wanted a mega co-op - predicted to increase export dairy sales from $7.7 billion to $30 billion by 2010 - and had waited patiently since the last talks collapsed in March for their directors to negotiate a new deal.

"If anything they want it more than ever. By a fluke of geography you either supply one company or the other. We are the same farmers, we have the same views, but at director level there is supposed to be a great difference in philosophy between the two companies. That's just ridiculous," Mr Pedersen said.

If the companies deliver the merger tomorrow it will mean the nation's 14,000 dairy farmers will have waited five Christmases for a package that promised them $300 million a year extra.

The first study suggesting the integration of manufacturing and marketing would deliver such benefits was done in 1995. It showed that the millions of dollars would be saved if the industry used the resources spread around the then dozen or so manufacturing companies efficiently rather than competitively.

Bay of Plenty farmer Paddy Briscoe, a shareholder of one of the four now defunct companies that commissioned the study, said yesterday that the $300 million was known to be conservative "and probably half what would be available."

The minimum level of savings had since been confirmed by at least three more studies, so the delay in integrating the industry had cost farmers at least $1.8 billion. "When you start thinking about that, someone should hang for it, really," said Mr Briscoe.

Mr Pedersen was confident the Government, which would need to pass legislation to deregulate the industry, would back an application to the Commerce Commission.

In a draft decision on the industry's last application, the commission had declined the merger because the detriment to farmers of having only one company to supply had outweighed the benefits of the deal.

A commentator said that this time around the industry needed to better explain the advantages to farmers, and the country, of creating a company that would be able to compete in an international market in which huge players were rapidly consolidating into even larger groups.

In the five years since the mega co-op was first mooted it has slipped from potentially taking the seventh slot in world dairy company rankings to 14th, or lower.

Melbourne-based National Foods stock jumped 11 per cent after Credit Suisse First Boston bought 28.8 million shares on behalf of New Zealand Dairy Group. "We believe they [NZ Dairy] have taken their stake to 19.9 per cent, which is the limit," said National Foods spokesman Ian Greenshields. Under Australian law, a company buying more than 19.9 per cent of a target must make a full takeover offer.

NZ Dairy bought 7 per cent of National Foods in October.