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Dairy Merger Questions And Answers

Key Questions And Answers

Merger of New Zealand Dairy Group and Kiwi Co-operative Dairies

Why is the merger important?

The merger is important because scale matters in international markets. If we do not maintain sufficient scale to establish and maintain global brands, we will be reduced to being a supplier of commodities to manufacturing businesses.

Currently the New Zealand Dairy Board gives the industry that scale and it has been successful in overseas markets. But the separation between the marketing and manufacturing arms of the industry, as represented by the board and the companies, is not viable long-term. Marketing and manufacturing must be integrated for the New Zealand industry to be able to respond quickly on world markets and at home and remain a major global player.

A merger between the two biggest dairy companies, and the integration into the new company of the New Zealand Dairy Board is the best way to achieve the needed integration, while maintaining the scale of the New Zealand industry and along with ownership and control by New Zealand dairy farmers.

What happens if the merger doesn't happen?

If the merger doesn't happen there will either be industry stagnation with the current structure or chaos as competing companies go their separate ways and fight over the bones of the board. If the companies were to go their separate ways, they will be too small to survive as global players and will eventually be forced to sell out to international companies. The merger avoids this and is the most effective way to preserve New Zealand ownership of a growing New Zealand dairy industry.
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If the merger is so good, why has it taken you so long?

The time taken to achieve the merger through very difficult negotiations highlights exactly why the merger is so important: competitive pressures drive the two companies to compete with one another rather than to co-operate for the good of the industry as a whole. Through the negotiation process, the companies have had to reconcile what is good for the industry as a whole with the interests of some of their stakeholders, while all the time working with two boards with different sets of commercial objectives. Detailed consideration also had to be given to the implications for the domestic market.

The merger will put this sort of delay behind us. One company and one board will work towards a single set of commercial objectives to the benefit of dairy farmer shareholders.

Won't the merger create an inefficient monopoly?

To the contrary. The new company will start out being only the 14th biggest dairy company in the world. Every day, in 120 countries and territories, it will face intense competition from much bigger companies.

Intense competition at home will be assured through the sale of the Dairy Group's 50 percent shareholding in New Zealand Dairy Foods which currently has 40% of the market and which uses popular retail brands such as Anchor, Fernleaf, Fresh 'n' Fruity and Royal Tasman.

The removal of the board's export monopoly will also encourage smaller companies to develop a larger market in New Zealand as a platform to start exporting themselves. We should expect to see a wider range of dairy products on the local market.

But these local competitors will be largely dependent on the new company for milk supply?

That is true, but should the new company behave unreasonably towards them the Commerce Commission will have the power to introduce price controls after the regulatory review in three years.
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It is important to remember that the new company will export over 95 percent of its product. It is not going to be interested in trying to exploit size in a market as small as New Zealand's. Its focus will be offshore, trying to generate maximum returns for its shareholders and New Zealand.

How will dairy farmers - as milk suppliers - be assured they will be treated fairly by such a big company?

They will own the company, just as they do now, and dairy farmers are demanding of their companies' boards and management. In addition, governance arrangements will be enshrined in the company's constitution to ensure farmers cannot be discriminated against unfairly. There will also be a Shareholders and Suppliers Council to represent their interests and a Milk Ombudsman to settle any disputes.

Most importantly, competition for milk supply is likely to be enhanced with the removal of the board's export monopoly and rules to establish fair value for farmers wanting to exit the new company and work with a competitor will be enshrined in the new company's constitution.

Finally, of course, there is the regulatory review after three years and the prospect of price controls if the new company's competitive behaviour is inappropriate.

What does the merger mean for employees of the three companies and their subsidiaries?

There will be some job losses as a result of the merger, to remove duplication in the industry. These will be mainly at the corporate level. Through the transitional period, the companies are determined there will be no disruption to export marketing operations.

As the benefits of the integration of manufacturing and marketing flow through to the industry, there will be significant growth in the industry, creating new jobs in both marketing and manufacturing.
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What is the timeline for this?

The companies will be talking extensively to shareholders through January and February. In early March shareholders will receive a formal Amalgamation Proposal and at the end of March there will be a vote. Subject to 75 percent support from the shareholders of both companies, the companies will formally merge on 1 June 2001, the start of the 2001/2 dairying season.

This is all subject to the companies having confidence that the Government will implement the necessary legislative and regulatory changes in time for the 2001/2 season.


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