Dairy Group in share talk showdown

By Philippa Stevenson

agricultural editor

Dairy industry campaigner Graham Calvert has drawn a lesson from last Saturday's gruelling netball contest as he heads to what promises to be another bruising encounter between fierce rivals.

Most of the directors of the country's two biggest dairy companies, New Zealand Dairy Group and Kiwi Dairies, will attend a two-day summit in Auckland this weekend aimed at breaking the impasse in their crucial merger talks.

Mr Calvert, a Dairy Group director who chairs the mega co-op establishment committee, confirmed the expected intensity of discussions by drawing a comparison with last weekend's hard fought battle on the netball court. It ended with Australia victorious over a heartbroken New Zealand.

"Look at the netball," he said. "Someone has to win."

The coupling of the big two is key to plans to form a giant dairy cooperative incorporating most dairy companies and the exporting Dairy Board. It is forecast to transform a $7 billion industry into one with $30 billion revenues in 10 years.

Directors of the Northland company, who have already tried to ease the bottleneck by proposing to merge with Kiwi and raise its negotiating strength, are also expected at the meeting.

The major goal will be to get agreement on the mega co-op's share structure.

Kiwi wants farmers to have one share fairly reflecting the value of their off-farm investment, and is concerned that proposed tradeability of shares will cost farmers control of the industry.

Dairy Group fears one share would encourage farmers to exit the industry, starting a "run on the bank" which would drain it of capital. It wants two shares, one reflecting the return on the export quota markets, and a second one in the high risk consumer products business. Milk payout would reflect supply, and possibly a manufacturers efficiency margin.

Smaller companies favour a single milk price but the big companies, which have invested millions in technology and infrastructure, are keener for the milk payout to reflect costs, such as transport.

However, one source observed that "if the large companies believed passionately in it [variable milk payout] they should be doing it now."

Behind the differences on structural detail, are major ones of culture.

Dairy Group is regarded as conservative, cautious, slow moving and favouring a more corporate industry structure. It has developed some marketing nous.

Kiwi is seen as a risk taker, operating to the margin and strong on cooperative principles. It has concentrated on manufacturing.

Their financial strengths vary but it is argued that they are at different stages of a development cycle. Kiwi has spent big and consolidated on one mega site, Dairy Group faces the cost of contracting to five major sites from nine in the North Island.

The company attitudes are largely the product of the strong personalities which have driven the companies either still, or in the recent past.

At Kiwi, chairman John Young and chief executive Craig Norgate, and at Dairy Group the former chairman John Storey and ex-chief executive Pryme Footner.

"All those people have been very dominant in their business for some time, and that has given us today's result," said an observer.

Dairy Group's current chairman, Doug Leeder, has been a long-time champion of the single company but is thought to be hamstrung by the need to manage a difficult board. Chief executive Graeme Milne is equally for the mega co-op but is still feeling his way into the job he started in June.

Industry sources likened the weekend clash to a cowboy shoot-out at high noon with the top prize agreement on the share structure but, in the circumstances, a close second would be just agreeing to continue talks.

Diplomatically, Mr Calvert portrayed the meeting as one which could simply resolve just one of the 48 issues raised by the Commerce Commission when it turned down the industry plan in a draft determination in August.

Some of the difficulty was culture, "but some is basic accounting," he said.

Heartening him is a belief that the culture of dairy farmers is similar.

"There maybe more differences at director level," Mr Calvert said.

Many farmers are simply frustrated that industry politics appears to be blocking their access to hard information which would enable them to make their own judgment on the mega co-op.

One of their key concerns is that shares would become tradeable, giving outsiders access to their industry and eventually taking it off them.

"If doing what is good for the business costs farmers control, many believe it is too high a price to pay," said one.

Also waiting, like meat in a sandwich, are the other companies.

Northland dairy company's Greg Gent warned of the costs of delay. "We can't spend forever trying to do it because to a fair extent the businesses are being run in a state of inertia. That can't go on forever because it will begin to cost money."

One commentator believes the big two need each other and are simply posturing.

Plan B, or Kiwi and Dairy Group going their separate ways, was simply not a viable option when considering the real reasons for the mega co-op - the many and growing challenges of the international marketplace.

He said as the bigger, Dairy Group could expect to amalgamate with the Dairy Board but would then have to pay out Kiwi's share.

By paying out, say, $1 billion, it would enrich a rival but weaken itself and for several years be unable to undertake new initiatives.

Meanwhile, Kiwi would have a manufacturing site but virtually no marketing expertise. It could, as it has threatened, join with an Australian company such as Bonlac but would still gain little marketing power in a dairying scene dominated by the likes of Nestle and Parmalat.

The analyst said Kiwi and Dairy Group were victims of the rhetoric they had used over the years to persuade their shareholders that they had the best performing company.

Until now, industry mergers had in fact been takeovers by the powerful of the weak. There was no model for a true merger of strong players.

"It's time they admitted they are joined at the hip and got on with it."