Bonlac deal `still looks good'

By PHILIPPA STEVENSON agricultural editor

The Dairy Board executive driving a proposed merger with financially troubled Australian firm Bonlac Foods has defended the deal against farmer criticism.

Dairy farmers here have queried the soundness of the proposal, mooted in April, which would create the first big transtasman dairy business.

Concerns have been prompted by Bonlac's financial problems, including high debt which prompted ratings agency Standard and Poor's to downgrade its credit rating to negative.

The agency was also concerned with Bonlac's ability to source milk.

Hundreds of Bonlac's 3000 Victorian and Tasmanian suppliers, including its former deputy chairman Dyson Scott, have abandoned the company in the last 18 months.

Many now supply the rival Murray Goulburn cooperative because its payout is at least 50c a kilogram of butterfat higher.

Bonlac, which had $A513 million ($644.8 million) worth of debt in June last year, had a debt to capital ratio of 74.4 per cent. It has $A1.5 billion worth of annual sales and embarked on a $A36 million rationalisation programme, which will close four of its plants this year.

But Chris Moller, group managing director of NZMP, the Dairy Board's global ingredients business, said a merger with Bonlac still looked good.

The board had done an extensive analysis of the Australian dairy industry last year which showed Bonlac "was the party that strategically and synergistically fitted with our organisation best."

The analysis was done before Bonlac's problems were known but that did not cause the board to re-consider.

"It caused us to negotiate," Mr Moller said.

"The issue is not whether you do the deal or not, the issue is whether you pay the right price relative to the value inherent in the deal."

He said the plan was a unique opportunity to build the board's consumer business in Australia.

"It will be able to move from the very successful platform it has now into a much larger, broader entity and really drive [our] brand position in conjunction with the brands Bonlac already has. In the international area there is a significant opportunity to work closely with Bonlac on the marketing of ingredients."

Mr Moller said due diligence, expected to be completed next month, would determine what price the board paid for the underlying worth of Bonlac.

The two company's boards could be ready to make a decision in August.

The deal would give the merged company the top two cheese brands in Australia, the top butter brand, the two leading food service companies and the same position in ingredient business.

"Amalgamate all those operations into one in Australia and you have a very powerful organisation with very significant market shares."

Such benefits justified doing the deal despite Bonlac's current financial performance.

He said Bonlac farmers were being paid significantly less than their counterparts in other cooperatives but "I am confident that most of that pain will have been dealt with in the financial year that has just ended."

Under the proposal the two companies' consumer businesses will be merged into a separate joint venture to be owned and operated on a fifty-fifty basis.

The board will merge its Australian ingredient business into Bonlac and take a 25 per cent interest in the company, with Bonlac suppliers holding the remaining 75 per cent.