Board dispute lingering headache for industry

By PHILIPPA STEVENSON

The disputed valuation of the Dairy Board is one of the few hangovers of dairy industry restructuring after Fonterra's sale of its shares in New Zealand Dairy Foods.

Tatua and Westland, the dairy companies which have stayed independent of the mega co-op, say Macquarie Bank's valuation of the board is too low, but Fonterra says it is "overcooked".

In a process that could drag on until the end of the year, the companies have gone to arbitration on the dispute. Tatua and Westland appointed an arbitrator in January, as did Fonterra.

A third will be appointed before the arbitration begins.

Tatua chairman Dr Alan Frampton told the Business Herald that if the process went "reasonably smoothly" he hoped for a result towards the end of the year.

Macquarie Bank, appointed by the Minister of Agriculture, valued the board's more than 988 million shares at $3.51 each.

Tatua has already received about $26 million for its shares and Westland around $84 million - amounts that could rise or fall depending on the dispute's outcome.

Frampton said directors' fiduciary duty meant they wanted to be able to "look shareholders in the eye and know it was a fair and reasonable result".

The board's assets were built over 60 years by generations of dairy farmers and it was just as important to Fonterra shareholders as it was to Tatua and Westland that they be valued fairly, he said.

There was a "certain attraction" for Tatua and Westland in getting the highest price but the companies had always argued for a fair valuation.

If the board assets were undervalued, wealth would be transferred from the previous shareholders of Kiwi, New Zealand Dairy Group, Tatua and Westland to the future shareholders of Fonterra.

If the price was put too high, today's Fonterra, Tatua and Westland shareholders would be advantaged over future shareholders.

"It should also be noted that there are very strong incentives for Fonterra management to achieve the lowest possible share value. First, it reduces the financial risks associated with share redemptions ... and second, it sets a lower base from which to show capital gains."

Fonterra chief executive Craig Norgate has said any gain on the fair share value of $4.85 for the 2001/02 season was capital gain for the milk producer.

But Frampton said this was only so "if the board valuation has been properly carried out".

"Given the size of Fonterra and the assurances about future gains for its shareholders, there are likely to be strong pressures to create the most favourable starting position."

The valuation also changed the balance between a return on assets and milk price when payout was unbundled, he said.

"Farmers are entirely familiar with and more interested in a milk price than a dividend return. They are likely to be more comfortable with a higher milk price and a lower dividend."