Dairy mega-merger on high heat

By PHILIPPA STEVENSON agricultural editor

New Zealand Dairy Group and Kiwi Dairies wanted to court with less heat and more reason second time round - but they have still managed to set up a pressure-cooker deal.

As forecast, the mega dairy twins said yesterday that they would merge, a cornerstone agreement that will integrate the industry from farmer to marketer and remove the Dairy Board and its legislative props.

The predicted efficiency gains and earnings goals are the same as those outlined when the last merger attempt failed in March. Eliminating duplication and improving productivity are expected to generate $300 million worth of annual savings.

And the new company, tentatively called Global Dairy Company, still aims to lift export revenue from this year's $7.7 billion to $30 billion by 2010, mostly by buying companies or forming joint ventures in other countries' domestic markets. That will give the company more access to the 90 per cent of world dairy markets traded within countries.

Only 6 per cent of dairy products are traded internationally and while New Zealand has 31 per cent of that market, it is aiming for a bigger slice of the bigger pie.

But the companies are straining an already packed agenda by declaring their merger intention right before New Zealand's traditional summertime shutdown.

The pair want the new company operational from the new dairy season, starting on June 1.

Agriculture Minister Jim Sutton has already baulked at the timetable, describing it as very optimistic.

"Indeed, given the many complex public policy issues raised, it doesn't seem likely to be possible."

With dairying so important to the economy, the Government needed to be sure that all issues had been carefully assessed. That included competition law, he said.

But yesterday, new company chairman John Roadley made it clear the industry did not want to tangle again with the Commerce Commission, which knocked back its first application last year.

He indicated that the companies wanted to avoid appearing before the commission by putting up a package of suggested law changes to the Government that dealt with the competition issue.

Essentially, the companies, which want sole rights to export for a year after the new company is established, want a three-year holiday from commission oversight.

They propose that the Government enact regulations allowing for the commission to then examine whether the company had discriminated against its raw milk suppliers, had not distorted competition with its fair-value entry and exit share price, and not overcharged competitors for any milk it might supply.

Mr Sutton said he did not want to anticipate what the Government's response would be to the proposal.

The companies must also convince three-quarters of the country's 14,500 farmers to support the deal, and intend to take a vote within three months - some task in an industry renowned for its long consultations.

The agreement has already cost the head of the Dairy Board chairman. Graham Fraser stepped down yesterday and is understood to be unhappy with the shape of the deal.

Mr Roadley has taken up the job, with Kiwi chairman Greg Gent his deputy in both the board and new company roles.

The inter-company rivalry over their respective valuations - a reason for the failure of the last negotiations - has been tackled in a new way this time. Both firms have agreed to abide by valuations formulated by international accountancy firm Arthur Andersen.

But farmers will also have to be satisfied they are getting a good deal, and that is only likely to turn up the heat on an industry already on the boil.

Ratings agency Standard & Poor's gave its rapid reaction to the proposed merger, putting Kiwi, Dairy Group and the board's credit ratings on credit watch - but with both negative and positive implications.