The average Westland Milk farmer will walk away with close to half a million dollars and gain exposure to a competitive milk price for the next 10 years if the co-op is successfully sold to the Chinese dairy giant, Yili, chairman Pete Morrison said.
The proposed $588 million transaction follows a strategic review of Westland — New Zealand's second biggest dairy co-op after Fonterra — by the board.
Morrison said the the main reason for the deal was Westland's inability to deliver a competitive milk payout in recent years.
Under the deal, Yili will at least match Fonterra's price for 10 seasons starting from August 1 this year.
The proposed sale to Hongkong Jingang Trade Holding Co, a unit of Inner Mongolia Yili Industrial Group, is at $3.41 per share.
Using a back of the envelope calculation, based on the average farm size representing 150,000kg of milksolids, Morrison estimated the deal to be worth $480,000.
Yili will also assume $342.5m of Westland's debt and other liabilities.
"It will bring capital to the West Coast and a route to the market," Morrison told the Herald.
Asked whether there was a "do nothing" option on the debt-laden co-op, Morrison said: "Clearly, we don't have a competitive milk price currently and we will need a relatively large retention," he said.
"Retention" is when the co-op holds funds back for its own purposes.
"This deal will bring us guaranteed competitive milk price for a minium of 10 years — that's a substantial difference for our farmers," Morrison said.
Federated Farmers dairy chairman Chris Lewis said he had received "mixed" feedback from West Coast farmers on the deal, which will require 75 per cent approval.
"West Coast farmers have had a tough time over the last five years with low milk prices, and other things, so the banks will be quite keen for farmers to cash in on some of this capital," he said.
Lewis said the deal highlighted the need for food processors to have very strong balance sheets.
Westland Milk has invested heavily in plant in recent years. Over 2016 and 2017, the co-op spent $134m on its infant formula capacity. Westland's profit for the year to July 2018 came to just $560,000, down from $1.5m a year earlier, and the last annual report puts its total interest bearing borrowings at $232.8m.
Morrison said the board believed that the proposed transaction represented "the best available outcome for shareholders".
Westland will seek shareholder approval for the proposal at a special shareholder meeting, which is expected to be held in early July.
Yili is the largest dairy producer in China and Asia and has a strategy to grow both its domestic and global businesses.
The company acquired South Canterbury's Oceania Dairy in 2013 and since that time it has invested $650m in establishing milk powder, infant formula and UHT production lines for Oceania.