Hart faces battle royal over Dairy Foods deal

Friday 12th April 2002

GRAEME HART: He has an international track record and Dairy Foods needs a committed corporate investor

Graeme Hart's Rank Group will not complete the purchase of New Zealand Dairy Foods without a struggle with some dairyfarmer minority shareholders and a swim in the cross-currents of dairy industry politics.

Fonterra Co-operative Group has announced the sale of 50% of Dairy Foods, the largest domestic dairy products company, to Rank for $1.70 a share, a total of $119 million.

Rank will offer the same for all Dairy Foods' B shares, now held by 6200 past and present dairyfarmers, being former suppliers to the New Zealand Dairy Group.

That values the average minority holding at $20,000 per farm.

The total outlay of $240 million is considered a moderate price for Dairy Foods, which turned over $420 million last season, and made only $1 million profit.

It has 40% of the domestic dairy products market, with brands such as Anchor, Fernleaf and Fresh 'n' Fruity.

An unsuccessful contender for the Fonterra stake was the Great Milk Company (GMC), which says it offered the same price as Rank, and now feels disadvantaged by the sale process.

Formed with backing from over half of the minority shareholders, GMC did not intend to admit defeat and advise a complete sale to Rank, chairman George Moss, said.

It is waiting for an independent appraisal by merchant banker Cameron & Co to be published.

Mr Moss said GMC supporters, most of whom are also Fonterra shareholders, don't believe the giant co-op maximised the Dairy Foods sale price.

Retained with dairy farmers' ownership, Dairy Foods could be a much-needed competitor for Fonterra, with export ambitions.

However, some large and influential Auckland dairy farmers, who are present or possible direct suppliers of milk to Dairy Foods, believe the sale to Hart's Rank Group is a good thing.

They include Dairy Foods' "No 1 supplier," Charlie Roberts, of Ardmore and the big Van Den Brink farming company at Karaka.

Representatives of both big winter milk suppliers have welcomed the Rank part-purchase.

"It is in the best long-term interest of Dairy Foods to have a big internationally experienced owner," Bill Charman, dairy farms manager for Van Den Brink group, with 2000 cows, said.

"Hart has an international track record and Dairy Foods needs a committed corporate investor.

"We will be retaining our shares and keeping him company," Roberts Holdings spokesman Paul Kenny, said.

All of the milk from 350-400 high-performance cows in the Roberts herd, all year round, now goes to Dairy Foods.

Another big direct supplier is the organic dairy producer Marphona Farms, of South Auckland, owned by Robert Pulman, a successful works contractor, also with more than 2000 cows.

But direct suppliers are small in number so far. Fonterra provides the bulk of the raw milk and cheese needed by Dairy Foods, under a 10-year arrangement which was part of the government's conditions on last year's giant dairy merger approval.

The price must be the same as that paid to Fonterra's 14,000 dairyfarmers, plus transport costs.

Approval for the Hart purchase also seems linked to the dwindling premiums paid by Fonterra for winter milk, once worth up to $3/kg milksolids over the basic dairy price (this season $5.30).

The Fonterra company has already signalled a sharply reduced winter milk (off season) supply premium for next year, down from 26c/litre presently to 11c.

It can take all the winter milk needed by Dairy Foods from Northland, where many herds calve in the autumn and utilise winter kikuyu pasture growth.

That premium has been attractive in past years but farmers near the country's largest urban concentration complain that the reduction will make the effort of autumn calving and winter milking uneconomic.

Mr Hart is buying into a complex brew of dairy farmer politics and allegiances and must secure the future of Dairy Foods as a powerful and expanding competitor to Mainland Foods, wholly owned and retained by Fonterra.

GMC's preferred approach was to bring in Pacific Equity Partners, which did the deal to sell Frucor (and the popular drink V) to Danone, the French dairy and beverages company.

Danone is already a dairy industry player in Australia and was another of the unsuccessful bidders for Dairy Foods.

So the tussle for Dairy Foods cannot be characterised as small guys vs the big guy, or Kiwi vs foreign.

Nearly all of the dairy farmers, having their best year for milk returns, are players on both sides and will be intrigued with the prospect of a bit of a flutter.

They will come up with a bewildering number of preferences, which GMC will have to try and weld into a coalition to prevent Rank Group making any more share purchases.

It may also try legal action over the sale process.

For its part, Rank can play on dairy farmer dissatisfaction with Fonterra factionalism and a perceived haste and arrogance in making the Dairy Foods sale.

If Dairy Foods under Rank would open up direct supply and restore the winter milk premiums, many local farmers would exercise their right to divert up to 20% of milk from Fonterra.

Fonterra chief financial office Graham Stuart said the GMC offer included terms and conditions which would have raised Fonterra's costs.

The Fonterra company was an informed seller and was competent to appraise the bids and come to its own conclusions, he said.

However, it is apparent that the Fonterra company is making up the game plan as it goes along.

No adviser or regulator could have foreseen the tangle which the Dairy Foods divestment may yet become.

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