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Chairman, Global Dairy Company - Speech Notes

Speech Notes

John Roadley
Chairman, Global Dairy Company

New Zealand Institute of Primary Industry Management

Friday 8 June 2001 Embargoed until 1.35 pm

In ten days, we’ll know whether there will be a 100 percent New Zealand-owned multinational, capable of taking on the world and winning. It is the most important shareholder vote ever, not just in our industry, but in New Zealand as a whole.

I’m pleased to have this opportunity to meet with you today. All of you are in close contact with our shareholders every day, and it’s important you have good information to answer their questions. I hope, if you’re asked, you see fit to recommend a “yes” vote for the merger. And, of course, each of you will continue to work in the industry once Global Dairy Company is in place.

We’re not unique in New Zealand in wanting to form a large, global company. Everywhere we look, in almost every industry, companies are consolidating to compete successfully in the new global economy.

In the retail business, the top 25 companies are involved in more than a dozen major acquisitions annually. It is making them enormous. Wal-Mart is predicted to be the first retailer to turn over a trillion US dollars a year, and that’s forecast to happen this decade. The Economist magazine says that eventually there will be just ten major food retailers in the world.

In response, we, the suppliers, have accelerated our rate of consolidation. Rabobank reports that there is now a dairy merger, acquisition or alliance every two and a half days. The market share of the biggest dairy companies is constantly creeping up. They are seeking economies of scale, wider brand portfolios, better market access, greater market share and greater market power. They need those things to be able to supply massive customers, and to have leverage with them.

Consolidation of the global dairy business means that if we in New Zealand stand still, we go backwards. Us doing nothing would be like the successful corner store doing nothing when the new supermarket came to town.

The consolidation of our domestic industry over recent decades – and particularly through the 1990s – is therefore no surprise. The question for shareholders in ten days is whether we take the next logical step in our industry’s evolution – or whether we seek an entirely different road, splitting the industry to compete against one another overseas, and opening it up to outside capital. The merger proposal is our last chance to make that decision.

You will all understand the strengths of our existing industry structure, and its weaknesses. At least when taking on the world offshore, our industry has long been united by the New Zealand Dairy Board. Our unity has given us the scale to invest in R&D, develop markets offshore and service the biggest customers. The co-operative structure has meant that the returns from our efforts have been delivered back to the farm gate; back to the regions; and back to the New Zealand economy.

We’ve become one of the world’s leaders and we’ve made a big contribution to New Zealand. In fact, if the rest of the New Zealand economy had performed as well as dairying over the last ten years, New Zealand would be ten more rungs up the global living standards table than we are today. New Zealand would have a living standard equivalent to the UK, rather than one equivalent to Spain. Some of our industry’s critics – the theorists in Wellington who can’t move beyond old-fashioned 1980s thinking and don’t understand co-operatives – should remember that.

For some years, though, it’s been clear to everyone in the industry that our current structure has passed its use-by date. When there were dozens of dairy companies, we needed to separate out marketing from manufacturing in order to achieve unity, scale and direction. With dairy company mergers, it is time to integrate our industry – to build on what the New Zealand Dairy Board has achieved by bringing it together with the manufacturing companies. That’s what this merger is about. We’re not doing away with the past and getting rid of the Dairy Board, as some would have argued. We’re protecting what we have built, but integrating the industry so we can operate more strategically on world markets.

The Business Case for the merger identifies benefits to farmers of up to $332 million by the third year. That’s around 30-odd cents per kilogram of milk solids, above what the international market and the dollar would otherwise have delivered that year. Some of the benefits – $120 million – come from cost savings as a result of the merger, mainly at senior levels. There’ll be one board, one CEO and so on. Beyond cost savings, we forecast around $70 million of revenue gains as a result of enhanced economies of scale from integrating manufacturing, marketing and distribution. We are looking at strategic gains of over $100 million a year, because the merger will allow us to better implement the industry’s strategic plan. We’ll have clearer and less complex lines of accountability, giving us greater flexibility in responding to changing economic, regulatory and marketing environments. Since we signed the Merger Agreement, we have also identified gains of nearly $40 million a year from Australasian rationalisation and expansion.

I believe the gains will be higher than the $300-odd million identified so far. Already we’ve learned more about the strategic gains we will get from our Australian relationships. That is only a beginning. The 1990s were the decade of dairy company mergers in New Zealand. More recently, offshore, there have been the initiatives with Bonlac, National Foods and Peters and Brownes in Australia, and with Dairy Farmers of America in the USA. They are all about a search for greater scale.

To continue gaining scale – as our customers continue to gain scale – we need to launch a much more aggressive and co-ordinated programme of international acquisitions and joint ventures. Remember the Rabobank statistic – one merger, acquisition or alliance every two and a half days? If we don’t expand our international programme soon, all the best opportunities will be taken. Do we want to be left with the crumbs? This is why Warren Larsen has described the merger as “essential”.

The day of the merger, Global Dairy Company will start out the ninth biggest dairy company in the world. From there, we will have an opportunity to climb up the ladder. If the merger were to fail, two smaller companies would have to go their separate ways. They would get into costly competition overseas. They would attempt to break up the assets of the New Zealand Dairy Board, destroying much of the value farmers have built up over the last twenty or even fifty years.

And those two companies simply couldn’t be as successful on world markets. They wouldn’t have the scale to launch a full international acquisition programme. They wouldn’t be large enough to be attractive as joint venture partners internationally. And two smaller companies wouldn’t have the leverage with global customers. At least one of them would inevitably become vulnerable to outside control. It’s interesting that the half-dozen individuals who say they have launched a campaign against the merger actually talk about bringing in outside investors, and that means outside control. If our industry were to lose our unity, we’d become a victim of globalisation instead of a winner.

The path we have taken to get to this point has taken half a decade or more. At times it has been tortuous. The previous Government tried to force the pace of change. It meant the industry was neither united nor committed. There was never any Merger Agreement. The collapse of the MergeCo proposal was hardly a surprise because it wasn’t company-driven, but it did leave our industry without a sense of direction. With the signing of the Merger Agreement last year, we got our sense of direction back.

We now have a unique line-up of support to achieve the merger, and maintain our unity and scale. The two companies and the Dairy Board are lined up together. The Government and the Opposition both say they will support the necessary legislation. We will never have everyone on the same track again. We are at a unique point in our industry’s history. It is now up to shareholders – as it should be – to make the key decision.

The proposal we are putting to shareholders reflects the historic Merger Agreement and our work with the Government. It maintains the co-operative principles of the industry, with shares to be held in direct proportion to milk production. There will be one share for every kilogram of milk solids. Supply Redemption Rights will replace the old “reserve shares” or “buffer shares” for those with fluctuating production levels season-to-season.

The big change is that shares in Global Dairy Company will be Fair Value shares. They will reflect the fair value of shareholders’ investment in the company. Each year, an independent valuer will identify a value range for the shares, based on forecasts for the global market and best valuation practice. The Fair Value process means that every year shareholders will know exactly how much value Global Dairy Company has created for them. They will be able to take that value with them should they decide to leave the company. Fair Value is an important step forward – an important discipline on the company and its directors.

We are also introducing peak notes, which shareholders must own in proportion to the number of litres of milk they produce at their peak each season. The mathematics can be complex, but the principle is not. Suppliers with high peaks impose greater costs on the industry. In fact, it is estimated that the industry currently carries double the processing capacity that it would need were production perfectly stable through the season. Peak notes mean those with high peaks, who contribute most to that over-capacity, make a greater contribution to carrying it. If they achieve a flatter production curve through the season, there will be a financial benefit for them. And if the notes lead to flatter production across the industry as a whole, that will deliver efficiencies that will contribute to higher payouts.

The number of Peak Notes a shareholder needs depends on their peak and the industry’s average peak, so it will change each season. With Fair Value shares and Peak Notes, we expect shareholders’ capital will be around four dollars per kilogram of milk solids in the first year.

The proposal we are putting forward also contains strong protections for domestic consumers and suppliers. At Global Dairy Company, we take a global perspective and we see ourselves as a medium-sized company, the ninth biggest dairy company in the world. From a New Zealand perspective, we’re aware that we appear to be an enormous company, twice as big as Telecom. We’re a 100 percent New Zealand company. We would never want to be anything other than the best possible corporate citizen here at home. The Government’s tough Regulatory Package makes it certain.

The first point is that the export monopoly will be abolished, and that will lead to greater competition in the industry. For the first time, there will be a real incentive for the global giants of the industry to enter the New Zealand market. There will also be greater incentives for smaller New Zealand companies to expand their operations. To kick-start competition, we are required to sell New Zealand Dairy Group’s 50 percent shareholding in New Zealand Dairy Foods. It has the domestic rights to key brands such as Anchor, Fernleaf and Fresh ‘n’ Fruity, and will start out with around 40 percent of the market.

Initially, competitors are likely to be largely dependent on us for milk. Because of that, the Regulatory Package requires us to supply them with milk, up to a limit set above the entire domestic market for dairy products in New Zealand. Essentially, we have to supply our competitors with milk so they can try to take our market share. Our suppliers are also able to sell up to 20 percent of the milk they produce on their farms to a third party, without us being able to discriminate against them in any way. And, with Fair Value shares, our suppliers can leave us at the end of a season, and take the fair value of their investment with them. They simply have to notify us by 28 February.

These measures mean that there will be even more intense competition on the domestic market than there is now. It would only take 170 average-sized farms to supply the entire South Island market for dairy products. And, every day, there will be the possibility of a global giant entering the New Zealand market to buy milk from farmers, manufacture it into dairy products and export them from New Zealand. If there is the slightest hint that our company is not performing to the world’s highest standards, one of those global giants will enter this market in a flash.

Some of the theorists in Wellington think they need to impose a two-company model to ensure there is a benchmark. The benchmark I care about as a supplier is the one against the leading global giants. The benchmark for Global Dairy Company will be against the other top-ten dairy companies in the world.

Monday week is the most important day in the history of our industry. Never again will the two companies, the Dairy Board, the Government and the Opposition all be lined up together. What we have achieved in the last six months towards this merger has been extraordinary. In just ten days, I’m confident we’ll be establishing New Zealand’s biggest company, the ninth biggest dairy company in the world.

There is a great future ahead for everyone in the industry. I’m sure each one of you will be part of it. All the best.


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