Review suggests Enza list on exchange

By PHILIPPA STEVENSON agricultural editor

Enza should list on the stock exchange and resolve costly tension between it and apple growers over how much fruit to export, says a review of the monopoly exporter.

The report by investment bankers Cameron & Co also suggests that a 20 per cent cap on individual shareholding be lifted and Enza, a statutory company with rights to export the bulk of the $600 million crop, study other countries' experience of deregulation.

With deregulation, initially at least, export quantities were likely to rise but prices fall, although there could be some cost advantages from higher levels of exporter competition, it said.

The review was commissioned by the Enza board in August, soon after Guinness Peat Group (GPG) and FR Partners took control of the grower-owned company, formerly the Apple and Pear Marketing Board.

Chairman Tony Gibbs, of GPG, promised there would be no sacred cows and hoped the review would lead to Enza pulling together in an efficient and effective way.

Since then the industry has lurched between controversies, culminating on Wednesday with growers marching on Parliament to petition for a relaxation of criteria for independent export permits, while Enza was in the High Court winning an injunction that effectively scuttled the consents process.

Yesterday, Mr Gibbs met the Minister of Agriculture, Jim Sutton, who was unhappy that Enza's legal action had added to industry uncertainty.

Mr Gibbs said he gave Mr Sutton the review at a meeting he described as cordial, but he declined further comment.

In Parliament, Mr Sutton said he was seeking legal advice on Enza's court action.

"If it becomes clear that activity in the courts is putting the industry at risk and the returns to growers seriously at risk, including of course organic growers, then the Government will act," he said.

The review was posted on Enza's website around midday. The report recommended stock exchange listing because of Enza's limited access to the equity provided only from grower shareholders.

It said Enza's constitution inevitably pushed it towards an inefficient capital structure because it created incentives to hoard capital. The cost of capital was also significantly raised by the restriction of trading to growers.

A Grant Samuel report had valued unfettered Enza shares at $4.87 to $5.82 but discounted the actual shares to between $2.43 and $2.91 because of the restriction.

"In the event that further capital is required Enza will be issuing capital at a lower price [higher yield] than would otherwise be the case," Cameron & Co said.

"Removing the restriction and listing on the Stock Exchange will remove this discount and increase shareholder value. All shareholders will then have the ability to observe the markets assessment of the value of Enza."

It said the constitution was designed as a defensive structure to prevent acquisition of a block of shares by large investors.

"The recent acquisition of significant stakes by FR Partners and GPG demonstrates that this defensive strategy was ineffective and no longer serves a useful purpose."

On the vexed issue of fruit volumes, the report said Enza management believed that as the volume of fruit supplied to overseas markets increased, the price that could be achieved fell. Limited work by Cameron & Co supported the view.

"If the demand curve is as Enza management believes, Enza profits are not maximised by maximising export fruit volume.

"Similarly, total grower incomes are not maximised by maximising volume. However, individual growers will always have an incentive to maximise their volume because [they] do not see the consequences of increased aggregate supply."

Enza had an incentive to manage export quantities but while this might serve to increase per carton returns it was unlikely to be readily accepted by individual growers who would see fruit not being exported.

"However, Enza believes that if it does not manage quantity from time to time, and simply exports all available fruit, prices will be lower and grower returns will fall.

"Depending on the approach taken to quantity management, Enza will wish to structure its business and the drivers of its costs and revenues differently."

The report recommended that Enza seek consensus on the issue with growers.

It also suggested Enza continue to monitor its commission structure to ensure its incentives to maximise profit were as far as possible aligned with maximising grower returns.