Dairy Board crosses the ditch

By PHILIPPA STEVENSON

The Dairy Board plans to merge with Victorian dairy company Bonlac Foods to form a $A520 million ($650 million) company operating in the Australian market.

The board, sole exporter of New Zealand dairy products, will also join Bonlac in exporting Australian products.

The move, discussed for more than a year, is a significant breakthrough for the NZ industry, which lost direction when a mega-merger of manufacturing cooperatives Kiwi Dairies and NZ Dairy Group failed last month.

Yesterday, Agriculture Minister Jim Sutton said the plan to create the first big transtasman dairy business was evidence that the industry was determined to achieve its growth strategy. "It is also a welcome assertion of leadership by the Dairy Board."

The industry's plan is to become one of the top three world dairy traders by integrating manufacturing and marketing at home, and growing rapidly by acquiring overseas businesses.

Yesterday, farmers welcomed the Bonlac deal as a return to that goal.

Dairy Farmers of NZ chairman Charlie Pedersen said: "It is the only merger that would get my tick of approval."

It meant a New Zealand industry united into a mega co-op was still highly possible, he said.

The board has signed an in-principle agreement to merge with Melbourne-based Bonlac, Australia's second-largest dairy company with annual sales of $A1.2 billion.

Bonlac buys about 25 per cent of milk produced by Australian dairy farmers, and most of its sales are exports.

Under the proposal -- yet to gain approval from Bonlac suppliers and Dairy Board directors -- the board will take a 25 per cent shareholding in Bonlac, with the other 75 per cent still owned by the farmer-shareholders. The board and Bonlac will each take 50 per cent of the newly formed company.

At present, Bonlac pays its farmer suppliers up to $A25,000 a year less for their milk than its competitors, and its credit-rating outlook was recently downgraded to "negative" from "stable" by Standard & Poor's.

At the time, , Standard & Poor's said Bonlac's borrowings increased to $A513 million at June 30, 1999, from $420 million a year earlier. Debt to capitalisation in that period increased to 74.4 per cent.

Bonlac chairman Bill Hill said the move would allow farmer suppliers to receive more money.

"This initiative achieves our goals and provides the platform for a sustainable and growing business," he said. "It will also provide our suppliers with increased returns, both in competitive milk prices and enhanced business profits."

In March, Bonlac declared a first-half net profit of $15.582 million, up from $11.402 million a year earlier.

Board chief executive Warren Larsen said the move was highly strategic for NZ dairy farmers.

There were no problems with Bonlac's debt level, he said, nor with its planned $A36 million rationalisation in the next five months, including reducing its 13 plants to nine. "They are interested in lifting the milk price and we can contribute to that."

He said the new domestic company would be worth $A520 million, of which the board would contribute $A145 million and Bonlac the rest.