On the face of it, it’s a no-brainer. Weighed down with debt, Westland Milk, based in Hokitika is financially on its knees. Riding to its rescue, Chinese dairy giant Yili has come in with a $588m buyout deal which will yield $3.41 a share to the co-op’s farmer shareholders, and, as well, absorb Westland’s debt and liabilities.
According to Westland, the nominal value of its shares has ranged from 70c to $1.50 per share. For the average-sized Westland farm, the share offer translates to about half a million dollars cash.
The offer looks even more attractive since Westland had to cut its milk payout forecast, while other companies’ forecasts are rising. Westland, which has grown out of the West Coast’s 150-year dairy heritage, hasn’t paid a competitive milk price for several years.
The conditional deal comes with extra sweeteners. Yili has committed to collect all milk supply. It will also pay a competitive price of at least as much as the Fonterra farmgate milk price for 10 years.
But why would Yili go that distance?
Dairy farmers outside the Westland supply region are asking themselves that question. What are the long-term ambitions of the Chinese giant?
Inner Mongolia Yili Industrial Group first entered NZ with the purchase of the assets of Oceania Dairy in early 2013.
It then began development of a $236m infant formula milk processing plant on a 38ha block of land at Glenavy, near Waitaki River.That is Yili’s first major offshore acquisition and was undertaken, it is said, to enhance Yili’s “competitiveness”. Production from the Glenavy plant goes primarily into Yili’s supply chain.
As the largest company in the dairy food market in China and one of the fastest growing dairy companies across the globe, will Yili’s ambitions be satisfied with the acquisition of Westland?
That’what dairy farmers in other regions are pondering.
News outlets like the NZ Herald have been raising the wider issue of whether the co-op model is still up to the job. Increasingly, it’s been tough for the big dairy co-ops to strike the right balance between what farmers are paid and how much is retained.
Investment guru Brian Gaynor in the NZ Herald has argued the proposed sale of Westland to Yili should be a warning to the industry. He contends the co-op structure may be “on its last legs as Westland’s and Fonterra’s performance illustrates that these farmer-owned structures are struggling in a highly competitive consumer market environment”.
Mark Brown, from Devon Funds, believes co-ops are “somewhat archaic” corporate structures. In theory their growth is limited to the cash they retain after paying out dividends. In Fonterra’s case the co-op had global growth ambitions but has been held back by the lack of access to capital.
“Once they have exhausted their debt facilities, access to equity is limited to the minority non-farmer share pool, given that farmers—the majority shareholders— have no appetite to recapitalise the company”.
In Westland’s case farmers have been simply unable to put up the capital the co-op needed. Brown says Fonterra’s suspension of its interim dividend “gives me no confidence they are in significantly better shape”.
That’s not a happy outlook, either, for the country which was once led to believe Fonterra would become a “national champion” or for individual farmer-suppliers, however strong their faith in the co-op structure may be.
Co-operatives which have evolved into limited liability companies are generally more profitable, as shown by Kerry Group listed on the Dublin Stock Exchange. It has a sharemarket value of 17bn Euros. By comparison Fonterra has an effective sharemarket value of $7bn.
Gaynor wonders whether Fonterra will heed the warning signal from Westland’s fate. He suggests that if Fonterra doesn’t, is it then a question whether the country’s dairy sector will end up in foreign control just as has happened to our banking, insurance, forestry and pulp & paper sectors?
No wonder there are dairy farmers asking themselves just what Yili’s intentions could be.
And there’s the issue of the key feature in the legislation which established Fonterra (and is currently under review). It is the stipulation that Fonterra must accept all the milk which is offered to it.
On that basis many farmers have borrowed heavily to finance their operations. If the assurance they have a buyer for all the milk they produce is removed, who might they supply? Overnight the valuations on which they borrowed could collapse.
Not a pretty prospect.