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Preliminary determination says no to mega-merger

Commission's preliminary determination says "no" to dairy "mega-merger"

Media Release 1999/96

The Commission's preliminary view is to decline to grant authorisation to the proposed merger of the Dairy Board and up to eight dairy companies.

The conclusion reached in the Commission's draft determination is based upon information provided to the Commission to date. It should also be appreciated that the Commission's deliberations have been against a background of uncertainty about the:

ofinal form of the proposed legislation, oproposed constitution of NewCo, and oproposed contractual arrangements between NewCo and Dairy Foods.

The Commission will now proceed as follows:

ointerested parties may make submissions in response to the Draft Determination by 17 September (the Commission has invited responses on 48 questions in the Draft Determination) oa public conference will be held in Wellington from 5-8 October 1999.

The Commission's final decision will take into account all further information provided through the submission and conference processes.

A key concern of the Commission is that the proposal will give the merged company, NewCo, potential control of all milk produced by farmers.

Under the legislation as currently proposed, and under NewCo's current draft constitution, farmers would be potentially locked in to NewCo. Under both the legislation and constitution there is no requirement that NewCo provide fair value entry and exit opportunities for farmers.

As a result, the Commission's current view is that dominance is likely to arise in a number of domestic markets including those for:

othe acquisition and supply of unprocessed milk in the North and South Islands, and othe processing and wholesale supply of town milk in the North and South Islands.

The concerns the Commission has in these markets point to significant detriments for dairy farmers and domestic consumers.

The application provided little assessment of detriments, except to state that there would be checks and balances in place to help prevent economic inefficiencies arising. Limited information or explanation has been provided on these checks and balances. Further, NewCo's constitution is in draft form only and has yet to be adopted by the dairy farmers.

With NewCo having control of the flow of unprocessed milk from farmers, the Commission considers that potentially there will be detriments including the following:

oNewCo will be under less pressure to allocate its resources efficiently, and to keep its costs down, oNewCo will be under less pressure to respond quickly to changes in the industry, oNewCo could reduce pay-outs and quality of service to farmers, and oNewCo could increase prices and reduce quality of service on domestic consumer markets (such as those for town milk and cheese).

The applicant has claimed that significant benefits will arise from the merger.

In this preliminary assessment of the proposal, the Commission has not accepted many of the claimed benefits because it was not convinced that they could not be gained in the absence of the proposed merger.

The Commission's assessment in this Draft Determination, based on information currently available, is that detriments could be between $138 - $527 million a year, while benefits likely to flow from the proposal could amount to between $26 - $92 million a year.

As earlier mentioned, we now invite submissions in response to our Draft Determination. Some 32 parties have already indicated that they will attend the conference in October and we look forward to hearing their views on this proposal.

Acting Chairman

Mark Berry

Copies of this media release, the backgrounder that accompanies it and the draft determination will soon be available on the Commission's website, www.comcom.govt.nz, and in hard copy from reception at the Commission's Wellington office, level 7 Landcorp House, 101 Lambton Quay.

Media contact:

Commerce Act Manager Geoff Thorn
Phone work (04) 498 0958

Communications Officer Vincent Cholewa
Phone work (04) 498 0920

Commission media releases can be viewed on its web site www.comcom.govt.nz

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