Mergers in air after mega co-op move

By Philippa Stevenson

New Zealand Dairy Group's growing control of the Dairy Board after last week's merger with South Island Dairy Co-op (Sidco) is about to force the hand of other companies.

Former Dairy Board chief executive Murray Gough, a director of Taranaki's Kiwi company, told the Business Herald that the remaining eight companies had a brief time to decide on forming a mega co-op.

"The success of a large integrated company will depend heavily on three factors: the chief executive, the culture that is established, and how much of New Zealand's milk is attracted," he said.

"With a new CEO appointment to be made at Dairy Group, and a willingness by most companies to consider the mega-merger concept now, there is a small window of time in which these critical factors are unusually positive and flexible."

Mr Gough said the industry might split into two or more competing entities, but "it is unrealistic to imagine that a joint-venture basis of running the Dairy Board can work for long."

"Such a structure will never produce the single-minded dynamism and efficiency that farmers desperately need."

Mr Gough said there was no way a company's competitive performance could be measured if its products were sold through a marketer controlled by its dominant rival.

"If performance can no longer be fairly compared and independent marketing decisions can't be taken, what is the point of companies remaining separate?"

Mr Gough said there were significant Commerce Commission and political issues to be overcome in moving to a mega co-op.

However, "the political environment is as favourable now as it is every likely to be."

Substantial gains could be made in streamlining the chain from factory to customer. They were not just in greater efficiency but in critical mass and focus in the global marketplace, "and of capturing for farmers and New Zealand the benefits from adding value," he said.

The board chief executive, Warren Larsen, said farmers needed to look at options other than the mega co-op to be sure that the work had been done to make them feel comfortable that it was the right choice.

On Friday, the Commerce Commission warned dairy companies that they could not sidestep the Commerce Act.

Kiwi has urged for a mega co-op to be formed by June 1, but the commission said an authorisation process would take a minimum of 60 days.

The commission is also investigating the Dairy Group/Sidco merger for its potential to dominate the Dairy Board.

It has said influence might arise if the industry did business through informal links and ties between participants.