Thursday, September 3, 2015

Gerrard Eckhoff: Merger talks

At first glance, the Roman legions crossing the Rubicon River 2000 years ago has nothing to do with the parlous state of the NZ meat industry yet the expression “to cross the Rubicon” is exactly what some reformers of the industry are calling for. Crossing the Rubicon has evolved (in English) to mean - there is no going back. Alea Iacta Est ; The die is cast.

The need to change many facets of the meat industry is obvious. Those industries that refuse to adapt - to changing trade patterns, production levels and competition - are doomed to fail as history shows.

To merge Silver Fern Farms and Alliance as the first step towards rationalisation of the industry is fraught with questions and will also mean there is no going back for the shareholders of both companies if things don’t work out as hoped. To obtain 6% shareholder support for a special general meeting to discuss why a merger should not occur - is no simple task; however it could also mean that the remaining 94% of shareholders are somewhat less enthusiastic about the merger proposal as the first step towards reform of the meat industry.

And what of the rest of the meat processors in NZ? The remaining 50%. Will it be competitive business as usual at the farm gate and in the international market place?

Producers enjoy competition when buying and selling so many may not agree to forgo competition when selling their produce, despite the negative impact on processors/exporters not knowing where or when supply of stock is coming in for processing. The rest of the “independent” processors within the meat industry would undoubtedly see the new large co-op and their suppliers - as fair game.

It is noted that in the dairy industry, Fonterra sees cherry picking of their suppliers as a significant problem.

It is also hard to see cash strapped sheep farmers investing sufficient funds to ensure proper capitalisation of a new co-operative. Where then will the essential new capital come from? More bank debt or will all shareholders be approached to guarantee support for a single co-operative processor before any decision to merge? And who would sit on the board of the merged company? Some profiled individuals involved with the industry over the years will no doubt see an opportunity to reinvent themselves. That would be a mistake.

 It is unusual to say the least for shareholders and not the directors to instigate a merger - which is the case with SFF and Alliance. Deals can look great on paper but traditionally there is less attention paid as to how the integration of the two separate company’s cultures allow for a successful transition into one well functioning company.

International experience shows that most mergers fail to produce anywhere near the projected benefits, yet some do where there are clearly identified commercial reasons.
It is worthy of note that Price Waterhouse Coopers were commissioned approx seven years ago to report on the benefits or otherwise of a merger between Alliance and SFF. Why has that report not been released to the shareholders who paid for the report?

There are however other aspects of this merger proposal which the wider public have an interest in. The social, cultural and environmental considerations of the sheep industry, barely warrants a mention during this merger debate. It is increasingly noted that stakeholders, such as the industries’ work forces are pretty much ignored. It is also well understood that environmental impacts of the sheep industry are much more manageable, so it would seem not unreasonable to assume that the wider community also has a significant interest / stake in this important discussion. It is however the all important cultural differences that are simply glossed over by the advocates of a merger. The takeover by PPCS (now SFF) of Richmond was an unmitigated disaster for PPCS due in large measure to the cultural differences between the two companies.
Has nothing been learned by the advocates of a merger of the Southern co-op’s?

Some farming folk believe that it is only through cooperatives that farmers can exercise a measure of control over the industry. In truth farmers have never had any effective control over the industry. Neither SFF nor Alliance are or have ever been true cooperatives.

Both would take non shareholders’ stock for processing, sometimes ahead of loyal supplier shareholders. Traders in prime livestock played one co-op off against the other - much to the annoyance of shareholders. And so it goes on.

It is the refusal by exporters to cooperate in the market place that reflects badly on the sophistication of the export industry. They still seem to believe the ‘enemy’ is within.

The highest level of cooperation must occur in the marketing of all NZ meat protein as the first vital step towards re-establishing the sheep industry.

The finance and investment industry reports regularly as to their prospective returns back to their investors. There needs to be a mechanism set up within the industry to inform all producers who is performing within the market place. Tell the producers which companies are “cooperative” and who isn’t, then maybe, just maybe sensible decisions will be made as to whom farmers should supply on a long term basis.

The question of whether to merge or not to merge can then be made with hard data readily available, which currently is not the case.

The solution to the sheep industry’s woes comes with the right structure and an agreed strategy in equal measure. Mergers or takeovers will then occur but only for the right reasons and with the right people at the helm. It behoves us all to remember the Greek economy and its failure to change. There will however be no bailout for the sheep industry.


Brian said...
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Mergers incorporated

As a retired dairy Farmer I always considered the Meat Industry way behind the times, especially in its competitive marketing. Some years ago I saw the results in the UK of lamb marketing with Meat companies competing against each other when it was patently obvious that the Europeans subsidized lamb companies were the real enemy. All that happened was that the farmer got less thru the internal war between NZ Meat exporter organisations, coupled with the indifference shown by all Governments no matter their political colour.
As a farmer who welcomed the formation initially of Fonterra as a single market seller, and then watched while the Government systematically destroyed this concept with its stupid monopoly propaganda and political action in demanding Fonterra supply milk to its competitors. One can but wonder at their motive, was it a concern about a monopoly or was something deeper within our political system?
However since the formation of Fonterra, those farming lamb, and beef need a categorical assurance that the Government will refrain from any interference should they form a single market organisation similar to Fonterra. Although this idea might be contrary to party political whims and re-election chances!. Which we all know, always come first on any agenda!

Anonymous said...
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The fact is that there is just too much money/book value capital in tne industry and to rationalise it is going to cost someone. The failure to fix the industry is a failure to decide who carries the can. Someone is going to lose and everyone is rushing for the one vacant chair.
In the end markets will rule and maybe an injection of Chinese cash will rule who loses.
Jeremy Laurenson