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What next for the meat industry?

By Oliver Roberts, Partner

First published in The Rural News 23 June 2009

Alternatives may need to be explored to the SFF and Alliance merger, given their acrimonious background. Oliver Roberts, a specialist in commerical and corporate law at Duncan Cotterill, discusses the issue.

A solution for reform of the red meat industry continues to be elusive, what with Silver Fern Farms and Alliance still not talking and PGG Wrightstons licking its wounds.

From a corporate perspective, merging companies is a complex and expensive process. Add to that hostility from board members and it becomes almost untenable.

Mergers are justified based on perceived synergies available to the amalgamated business but the reality is that they are usually driven by the desire to create short term value for stakeholders and the creation of personal wealth for key players involved.

The misnomer of supplier owned cooperatives is that the underlying share value is immaterial. A farmer wishing to sell his shares in either SFF or Alliance will receive their original subscription value, well below any true net asset value (it remains to be seen what SFF propose to their shareholders next month (July) in terms of a different share structure). Value is, therefore, in the supply contracts and the farm gate prices paid for stock through the rebate systems. The real driver for merging cooperatives is not share value but the synergies, improved market power and cost savings that could in turn improve supplier returns.

While management at SFF and Alliance may have disagreed on relative business values in 2007/8, supplier shareholders should have been less concerned with share value. For it is only through efficient processing, procurement and well managed branded sales that farmers will ever see any sustained improvement in prices.  The key players may actually agree on what needs to be achieved but their reluctance to leave behind past rivalries and look to the future holds them back. It is all too easy for purchasers (often supermarkets or wholesalers) to play one off against the other and drive down prices.

New Zealand has an excellent international brand in itself. Some of our companies have managed to exploit this, placing themselves at the premium end of the price range. The meat industry has so far failed to capitalise on brand NZ, resulting in lower returns for all stakeholders involved. Both cooperatives will fail their supplier shareholders unless they recognise where their synergies lie and where they can collectively improve their returns.

We need to be mindful that mergers do not cure inherent problems in companies. The idea of a four way mega merger had merit but it was never a realistic starting point. The merger or collaboration of SFF and Alliance must surely be the first step to any larger organisation. Undoubtedly there is work to do inside both cooperatives and some good will come of the rationalisation programmes and branding programmes already under way. Reform also needs to include better corporate governance and accountability. While farmer suppliers need representation on the boards, the core executive board should be selected from the best talent available in the market - and once appointed be held accountable for their success or failures. 

A full merger of SFF and Alliance is the obvious solution but given the history, alternatives may need to be explored. This could include a merger of some key parts of the supply chain or collaboration at a branding or procurement level. What MIAG (Meat Industry Action Group) called for in mid 2008 was simply that the respective boards discussed solutions and be held accountable in the hope of moving forward. MIAG’s proposals were rejected by Alliance shareholders but not the concept of merger discussions or greater accountability.

The reality of the present impasse between SFF and Alliance is that both remain price takers in the end market despite the quality of the product they process and sell. The danger for New Zealand famers is that an opportunity to change this structure could well be taken up by privately owned parties. As we saw with PGGW, there is appetite for this driven by perceived value creation but not necessarily for the farmer supplier. The UK farming industry has suffered for 20 years at the mercy of Brussels and the large supermarket chains dictating terms, there is a real danger that our farmers could follow suit if they lose control of these cooperatives.

Obtaining consensus from farmers on the way forward remains the greatest challenge to change. The management teams owe a duty to their shareholders to consider all the options and make their recommendations for change accordingly. The shareholders can then decide on the future of their industry.

• Oliver Roberts is a partner at Duncan Cotterill, specialising in corporate and commercial law. He practised as an M&A lawyer in London before emigrating to NZ in 2006. o.roberts@DuncanCotterill.com