Mystery deepens as merger vote nigh

By Rod Oram

Between the lines

Mystery Creek is the aptly named venue for today's vote by the farmer owners of New Zealand Dairy Group on its proposed merger with South Island Dairy Co-op; it is a mystery on what financial grounds they would vote for it; and they are up a creek without a plan.

At best, the deal is an expensive and unnecessary detour. The aim is another "one plus one" merger even though the river of industry restrustructuring is flowing ever more strongly to a multi-co-op merger.

One big co-op, proponents argue, is the only way our small dairy industry can foot it against far bigger international players.

The deal is on the table only because the boards of Dairy Group and Sidco failed to grasp the nettle. They begged off a multi co-op merger saying it was too difficult. They reckoned they could only achieve a fair and transparent deal for the owners of all the co-ops concerned if they reached a mega co-op through a series of bilateral deals.

But quick-fire bilaterals are a waste of time and money. Consider the Dairy Group/Sidco proposal.

To encourage a "yes" vote from its farmer-owners Dairy Group is offering them a one-off payment of $80 million and 50 per cent of the shares in its subsidiary NZ Dairy Foods.

Yet, this proposal is deeply flawed financially on three accounts: first Dairy Group is literally "giving" farmers shares in something they already own.

Second, farmers will pay interest on the group's increased debt used to fund the cash payment.

Third the payback is lousy. Dairy Group reckons the financial benefits of the merger start at $2 million a year and will rise to $7 million after four years.

If this deal is approved, the best hope for farmers is that Dairy Group plus Sidco move on smartly from squandering financial and managerial resources by leading the drive to the rational goal of one mega co-op.

Dairy Group says it has a plan to do that through more bilateral mergers. But that is not a plan. It is only a hope which might not come to pass because Dairy Group's board is split.

Some directors are committed to one co-op. Others believe the industry should stick at two - as long as one is dominant (Dairy Group plus Sidco) while the other (Kiwi Co-op Dairies) is subservient.

Such an imbalanced two-party structure has big disadvantages. The two will inevitably squabble over the industry's key asset - its international marketing arm in the form of the Dairy Board. And they will squabble over allocation of production to their plants, with resulting inefficiencies.

Such wastage could be avoided if farmers today pushed for a speedy realisation of a mega co-op, thereby showing more courage and clarity than the board they elected to run their co-op.