Talks urged to revive dairy mega-merger

By PHILIPPA STEVENSON

agricultural editor

Independent, binding arbitration could salvage the collapsed Dairy Group-Kiwi mega-merger if industry leaders were prepared to use the process correctly, says a prominent arbitrator.

Arbitrator John Larmer, past-president of the Arbitration and Mediation Institute, believes arbitration would separate boardroom politics from the decision-making process.

Company directors' rejection of the merger probably arose from their limited knowledge of the proper process, he said.

"Their knowledge of arbitration probably comes from sharemilking disputes and in the Waikato, in particular, we have had more problems with sharemilking disputes than anywhere else in New Zealand," he said.

Dairy farmers, appalled at Friday's breakdown of merger talks and the dissolution of the mega co-op establishment board, have renewed calls for arbitration to resolve the impasse.

Auckland Dairy Farmers chairman John Sexton said independent arbitration binding on both companies was the "only logical way forward."

"I urge all dairy farmers to contact their directors with their views urgently," he said yesterday.

Mr Sexton said the mega co-op was essential for New Zealand to maintain its rapidly eroding global marketing position. Leaders had a responsibility to implement the best strategy.

"Second best is not acceptable," he said.

In the dying days of merger negotiations, Kiwi offered conditional binding arbitration. The conditions included that the arbitration panel consist of an independent person and one director from each company, that they adjudicate on each company's position made in a statement running to no longer than two pages in length, and that any compensation from one company to the other for value differences could not exceed 40c per total kilogram of milk solids produced - about $212 million should Kiwi have to pay Dairy Group.

Dairy Group found the conditions untenable and rejected the offer. Chairman Henry Van Der Heyden told shareholders by letter that it was likely arbitration "will go to the middle ground" because that was what usually happened.

"If you apply Kiwi's caveat of 40c either way, the middle ground is an equal deal. That clearly does not meet the mandate [of not going below 40c] you gave me," he said.

Mr Larmer said Kiwi's offer contained several fish-hooks and he understood Dairy Group's rejection.

Also, if Kiwi had better faith in its suggestion it would have put it on the table a lot earlier, he said.

However, a well-structured, binding arbitration process was the right way out of the industry's dilemma, said Mr Larmer, who is also a farm consultant and valuer.

"If it's true that the $7 billion industry would become $40 billion [with the mega merger] how can they walk away?"

Mr Larmer said New Zealand had top flight arbitrators who were in demand internationally, such as former Court of Appeal judge Sir Ian McKay and former judge David Williams.

"The idea that there is no one in the country capable of handling it is just nonsense," he said Mr Larmer said the boards could have agreed to merge, acknowledged they had different valuations and removed the decision from the board process by referring it to an arbitration panel.

Ill-feeling had grown between the companies after Dairy Group's merger with the South Island Dairy Co-op and Kiwi's merger with Northland, he said.

"There's this tit-for-tat and that's why the binding arbitration process has got so much going for it.

"Politically, it takes the heat off directors."

The likely constitution of the panel would be a legal expert "used to cutting through differing submissions" who would be advised by someone knowledgeable about major business valuations, possibly from overseas, and perhaps an engineer.

"The whole idea of the arbitral process would be to refer the matter to a party or parties who have nothing else at stake other than they are getting paid to make a decision," Mr Larmer said.

He believed it was a sign of limited thinking that directors involved in such a deal did not want decision-making to go outside their boardrooms.

"That is actually worrying because if that sort of thinking goes on to the Dairy Board, and it is supposed to be developing these marketing intitiatives to help us compete with these aggressive food companies, you really have got to say we're going to be in some strife in a few years."

Mr Larmer said mergers of New Zealand and Australian companies which could follow the mega-merger breakdown would be no easier than in-country deals.