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Dairy Mega-Merger - Comments At Media Conference

New Zealand Dairy Group
Kiwi Co-operative Dairies Ltd

Thursday 21 December 2000


Henry van der Heyden:

Thank you for coming here today. My name is Henry van der Heyden and I am the Chairman of the New Zealand Dairy Group. With me is Greg Gent, the Chairman of Kiwi Dairies. We are also joined by the Chief Executive of the New Zealand Dairy Board, Mr Warren Larsen, and Mr John Roadley, a director of the New Zealand Dairy Group.

Mr Gent and I are pleased to announce that this week our boards have approved a Merger Package to form a new company – a new company that will be integrated with the New Zealand Dairy Board. Subject to approval from 75 percent of our shareholders in March next year, the Merger will take place on 1 June 2001, in time for the 2001/2 season.

I do not need to tell you that this is an historic day for the New Zealand dairy industry. This may seem like the last major step in the consolidation of the New Zealand dairy industry over the last twenty years. However, more importantly, it is the first step in a new beginning for the dairy industry as a major global player. For the first time, our industry will be working towards a single set of commercial objectives for the benefit of our farmer shareholders and all new Zealanders.

Our industry is New Zealand’s only industry of global scale. We operate in more than 120 countries around the world. We generate more than 20 percent of New Zealand’s export receipts, and nearly 7 percent of our GDP. Ninety-six percent of New Zealand’s dairy production is exported. The New Zealand market is just four percent of what we produce. Because of our size, if the New Zealand dairy industry is strong, New Zealand is strong. If the New Zealand dairy industry is growing, New Zealand is growing.

The Merger Package we are announcing today will further strengthen the New Zealand dairy industry and ensure its future growth. It will integrate the manufacturing and marketing arms of our industry and create the 14th largest dairy company in the world. As only the 14th largest dairy company in the world, we will continue to face tough competition from larger companies on the global stage. But with our manufacturing and marketing arms integrated, we will be able to take advantage of opportunities in the global marketplace much more quickly. As the 14th largest dairy company in the world, we will be in much better shape than going it alone.

Greg will take you through the details of the merger – and the benefits. The benefits are in excess of $300 million every year – and if we succeed in growing our operations internationally, then we will be able to really build on that. For my part, I believe this is the most important business deal in New Zealand’s history. It has come after many decades of market-led consolidation in the industry. It follows many years of debate about the implications for the Dairy Board of that consolidation. It follows many months of tough negotiations involving myself, Greg, John and Richard Booth.

We now have a package. It is a comprehensive package that addresses all the issues that stem from the merger – from the structure of the industry to the new company’s competitive behaviour in the New Zealand marketplace. The package has been approved by our boards. We are now working with the Government to address the necessary legislative and regulatory changes. When we are confident of Government support for those changes, we will then seek the necessary 75 percent support from our shareholders. We believe the merger will not just benefit our shareholders but, through them every New Zealander. Greg will now take you through the Merger Package.

Greg Gent:

Thanks Henry. I agree with Henry that the negotiations were tough, but that was appropriate given the importance of establishing the new company on sound principles. And it is great to be here today, having done that. I’ll go through the full Merger Package element by element – there is of course supporting material for you to take away.

The first element is of course the merger of the Dairy Group and Kiwi Dairies, and the integration into the new company of the New Zealand Dairy Board. That company – which we are just calling Global Dairy Company for the time being – will have total assets of approximately $7.5 billion and represent about 95 percent of our dairy industry.

It will be by far New Zealand’s largest company. But it will, of course, still only be the 14th largest dairy company in the world. That goes to show the very competitive environment in which we operate globally – we have to be that big in New Zealand to even have a small say in the global scheme of things. It goes to show why we want this merger – and why we don’t want to risk getting in the situation of having to go it alone.

The Merger Package includes the removal of the New Zealand Dairy Board’s export monopoly. With the necessary critical mass, that statutory monopoly is no longer needed after one year.

The Merger Package ensures the new company will be owned and controlled by New Zealand dairy farmers. It will be a co-operative. There will not be opportunities for people outside the country to take control of the industry off New Zealand dairy farmers.

We’ve agreed on the board. Initially it will consist of 13 members, ten of whom will be dairy farmers, five from each company.

There are key business issues that we have addressed in the Merger Package. We will make sure the new company will promote the value of the brands and marketing infrastructure of the New Zealand Dairy Board. We will preserve the industry’s intellectual property. We will protect the quota rents we earn from market access arrangements. And we have established transitional arrangements to ensure there is no disruption to export marketing activities. Nothing is going to be lost from this merger. We are going to protect and then build on our existing strengths.

I want to explain some of the key benefits from the merger. First and most importantly is the integration of our marketing and manufacturing arms. The current structure creates delays in the ability of the New Zealand dairy industry to respond to opportunities in the marketplace. Every order we get, we have to spend time working out which company will supply it. It takes too much time to decide whether to acquire an offshore asset when the opportunity arises. We spend time debating the ownership of intellectual property rather than immediately applying it to new products in the marketplace.

With the merger, we streamline our decision-making. If a potentially valuable asset comes up for sale overseas, we can respond rapidly – and we won’t be competing against one another. These are the main benefits, and they are to do with our ability to respond strategically offshore, as a result of integration.

At home, we will also be able to work more strategically as a single entity, when it comes to investment in, say, a new manufacturing plant or R&D. And, of course, there will be other efficiencies, having one organisation rather than three.

The Chief Executives of the two companies and of the New Zealand Dairy Board have assessed these benefits to be in excess of $300 million a year to New Zealand.

The Merger Package also addresses the full range of issues that stem from the merger, such as ensuring the interests of New Zealand suppliers and consumers are promoted. There will continue to be fierce competition on the domestic market. To ensure competition in the consumer market, we will be selling the Dairy Group’s 50 percent shareholding in New Zealand Dairy Foods. It has about 40 percent of the New Zealand market. You will know it through the brands it uses in New Zealand – Anchor, Fernleaf, Fresh ‘n’ Fruity and Royal Tasman. It will continue to use those brands in New Zealand – that doesn’t affect our offshore operations.

New Zealand Dairy Foods and other competitors will, of course, be largely dependent on the new company for milk supply, and that raises an issue about our competitive behaviour. The way we are dealing with this is to say that if our behaviour is not appropriate within three years, price controls can be imposed.

Farmers also face a situation where we are dominant. Of course they own us, so that will put quite a great deal of pressure on us to behave fairly. Beyond that, the first protection is the prospect of competition in a deregulated environment. The constitution of the company will enshrine that we are not able to discriminate unfairly amongst farmers.

It will also enshrine rules to establish fair value for farmers wanting to enter or exit the company. This will ensure that should farmers wish to leave and supply a competitor, there will be no economic barrier to them doing so.

The Package also includes a Shareholder and Supplier Council to represent farmers’ interests. That Council will also appoint a Milk Ombudsman to settle any disputes.

That’s a comprehensive package that ensures fair competitive behaviour in the domestic industry, whilst at the same time ensuring that the New Zealand dairy industry has the muscle for the global environment.

Now let me take you through the timeframe for implementation. For the merger to happen, there needs to be legislative and regulatory changes. We need to be confident the Government will support them. When we are confident of that Government support, we can put a formal Amalgamation Proposal to shareholders. It is envisaged there will be a vote at the end of March 2001. If shareholders approve the merger, it will take effect from 1 June 2001. That’s an important date, as it marks the beginning of a new season for dairy farmers. We need – and our shareholders need – certainty that this is going to happen on 1 June so that we are in time for the beginning of the new season.

If we don’t meet that deadline, there will be serious compromises to our industry. Our industry and our companies can’t endure another season of uncertainty. We will both, I am sure, be forced to enter into alliances with international companies, in Australia and elsewhere. We’ll lose the opportunity to build a solely New Zealand farmer-owned and –controlled global dairy company.

We acknowledge that this is a tight timeframe. But we will work with the Government and shareholders to ensure it is met. It is so important we resolve this now, or else we face a very-much second-best future. I will now pass you back to Henry.

Henry van der Heyden:

I endorse those concerns Greg raised. There is only a small window of opportunity to achieve this merger. We’re sure the Government and our shareholders recognise that. It is something everyone in the industry has been saying for some time.

The industry is united behind this merger. We have agreed that John Roadley will be the first Chairman of the new company, and Greg will be his first deputy.

This merger is about integration of manufacturing and marketing. Earlier today, the board of the New Zealand Dairy Board met to consider the merger package, including John’s appointment as Chairman of the new company. To achieve integration of governance now, John will assume the Chairmanship of the New Zealand Dairy Board from today. Greg will become Deputy Chairman of the board.

It is with pleasure that I introduce Mr John Roadley, the Chairman of the New Zealand Dairy Board and the Chairman-designate of the new company.

John Roadley:

Ladies and Gentlemen. The two companies have made the most important step forward for the dairy industry and New Zealand business that any of us are ever likely to see. I endorse what they have said.

I am pleased to accept the chairmanship of both the board and the new company. Government-willing and shareholder-willing, we will get this done in the window of opportunity available to us. We will build the biggest company in the history of New Zealand – big by New Zealand standards but only just big enough to be a player in the global market. We will continue to grow the New Zealand dairy industry. We will continue to grow the New Zealand economy.

We have a proud history. In the last thirty years, our industry has continually achieved growth at a faster rate than New Zealand’s GDP growth. Our challenge – and my challenge as chairman – is to ensure we continue to lead the New Zealand business sector and the New Zealand economy. This merger will ensure we do.

Thank you for coming. We will now take your questions.


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