Westland Co-operative Dairy Company shareholders – after voting in 2001 against merging with other co-operatives to establish Fonterra – rejected a repeated offer to be absorbed into the giant new co-operative in 2002. An industry commentator described Fonterra’s effect on West Coasters as “the Monteith’s lesson unlearned”, a reference to the furore which forced Dominion Breweries to reverse a decision to close Greymouth’s Monteith’s brewery. Almost 20 years later, Westland shareholders are considering the sale of their company to China’s largest dairy producer, Yili, for $588 million at $3.41/share. They will vote in July on the deal. Bob Edlin looks at the process and key players.
The companies
Hokitika-based Westland Co-operative Dairy Company has 342 shareholders and more than 420 supplying farms. It processes around 3.5% of New Zealand’s milk solid volumes but – according to a recent TDB Advisory Ltd analysis of dairy industry processors – it under-performed the rest of the industry in its 2017 financial year and its debt to total assets is the highest in the industry at 38% (but down from 42% and both Synlait and Fonterra have carried higher debt levels in the past).
Hongkong Jingang Trade Holding is a subsidiary of Inner Mongolia Yili Industrial Group. Yili, listed on the Shanghai Stock Exchange, is China’s biggest dairy producer. It acquired Oceania Dairy in 2013 and has built a milk processing plant at Glenavy in South Canterbury, designed to produce milk powder for export to China where it is used by Yili to produce infant formula.
The regulator
The Overseas Investment Office has received an application and must give consent because Yili’s proposed acquisition of Westland involves sensitive land (4.8173 hectares of residential land) and significant business assets (worth more than $100 million).
Several staff will be involved in assessing the Yili application under the residential land consent rules which permit overseas persons to acquire residential land for non-residential purposes (such as offices) or for residential purposes in support of a business (such as worker accommodation) if certain criteria are met. The investment will also be assessed against the investor test criteria (for example, business experience and acumen, and good character).
‘Pamu will be carefully assessing what is in the best interests of Westland and dairy farming on the West Coast as it determines how it will vote on this important decision for the future of the company.’
Under the investor test, Yili must show the individuals with control of the company have the necessary business experience and acumen, are of good character, and have demonstrated financial commitment to the investment.
Economic and employment benefits will not be assessed because the only land involved in the Yili transaction is residential. If other sensitive land, such as rural land more than 5ha was being acquired Yili would have to apply under the benefit to New Zealand pathway and economic and employment benefits would be assessed.
Many variables influence the time taken to process an application – complexity, quality of the application and so on. But an application made under the residential land pathway is more straightforward and typically takes less time to consider than a benefit to NZ application.
The OIO will consult third parties as necessary to fully assess whether the applicant meets the criteria for consent.
Ministers’ roles
The consent decision may be made by Land Information Minister Eugenie Sage and Associate Finance Minister David Clark after considering a recommendation from the OIO, or it could be delegate to the OIO to make.
When Dairy Exporter raised questions about the process early in April the OIO said it needed to further assess the application before the decision-maker in this case was confirmed.
The decision-maker – either the OIO or ministers – would need to consider whether the application meets the investor test and the requirements of the residential land consent pathway.
The OIO would refer the application only to the decision-making ministers and not to others.
Landcorp
Landcorp Farming has 10 dairy farms (plus three dairy support farms) which supply Westland. It holds about 4.5% of the shares in Westland, but voting on the Yili scheme of arrangement would not be made on this proportional shareholding basis. Under the constitution Landcorp will have the same voting rights as a 100,000 kg milksolids farmer.
Pamu (Landcorp’s brand name) had not received the full details of the Yili offer when questioned by Dairy Exporter early in April.
Asked if executives or directors had been contacted by Government ministers to discuss what position the state-owned enterprise should take, a spokeswoman said: “This position will be a decision made by the board.”
Like other Westland shareholders, Pamu expects reasonable returns from the co-op, the spokeswoman said.
“In recent years we have been disappointed in performance.
“Pamu will be carefully assessing what is in the best interests of Westland and dairy farming on the West Coast as it determines how it will vote on this important decision for the future of the company.”
A spokesman for State-owned Enterprises Minister Winston Peters said this was a commercial transaction managed by the owners of the farming co-operative and Landcorp – one of many owners of the co-operative – did not hold a majority stake.
The shareholding ministers for Landcorp are Associate State-owned Enterprises Minister Shane Jones and Finance Minister Grant Robertson.
Other politicians
Agriculture Minister Damien O’Connor said he has no role or influence in the process as a minister – but as MP for West Coast Tasman he is disappointed.
“Coming from the West Coast it’s personally of concern for me,” he said.
“I don’t like the idea of selling. It’s a proud company and the biggest company owned by West Coasters.
“Most of the other companies on the Coast have been owned by people from elsewhere so the proposal to sell it is very sad for our region.
“There are serious concerns for the long-term issue of dairying in some areas of the West Coast, if you can’t guarantee to have your milk picked up – that’s why co-operatives were formed in the first place.
“But it’s an indication of the level of interest in our agribusiness sector from offshore investors.”
NZ First list MP Mark Patterson, from Clutha-Southland, switched from National to NZ First after the Peters-led party in 2016 firmly opposed Chinese purchases of this country’s meat and dairy processing companies. Notably, it condemned Shanghai Maling acquiring a 50% interest in Silver Fern Farms.
Patterson told Dairy Exporter he is a firm believer that long-term value will be captured behind the farmgate only if farmers have ownership of the value chain nearer to the consumer, where the margins are.
In the case of the Westland dairy co-operative, its dairy farmers were “incredibly vulnerable long term without the protection of the co-op model, as there will be no alternative options available”.
But Westland shareholders would make their own decisions, Patterson said.
“What I have done is urge them to fully consider the long view before selling the family silver… it’s the very least they owe the past generations who have built the co-op up.
“Ultimately as shareholders the responsibility falls on them to make sure their company is fully capitalised which is a discussion between the farmers and their board. If they’re not prepared to fund it themselves, then there is no choice but to bring in outside capital. Selling the co-op lock stock and barrel seems like the nuclear option.”
He couldn’t personally do anything regarding a sale to Yili but he is pressing for the next tranche of Overseas Investment Act changes to include restrictions of foreign investment in strategically significant national companies and infrastructure.
Because of NZ’s reliance on agricultural exports, dairy products in particular, “I strongly believe losing control of these very important companies like the Westland dairy co-op and the likes of Silver Fern Farms are ultimately against the long-term national interest”.
The PGF factor
The Government’s Provincial Development Unit suspended negotiations on a $9.9m loan to Westland Milk Products (the trading name of the Westland Co-operative Dairy Company) after the company signed the conditional agreement to sell to Hongkong Jingang Trade Holding.
The loan from the Provincial Growth Fund had been announced by Prime Minister Jacinda Ardern – accompanied by Regional Economic Development Minister Shane Jones and Damien O’Connor – on November 29 last year.
Dairy Exporter asked Jones if the co-operative had made him and officials aware of negotiations with Yili before the loan was announced, whether the Yili bid made Westland ineligible for the loan and whether the loan might be reconsidered, if the Yili bid fails to win the necessary statutory approvals.
A Jones staffer referred us to a statement from Robert Pigou, head of the Provincial Development Unit, who said if the sale was confirmed by shareholders, the loan would no longer be required by the co-op.
“The process to negotiate funding from the PGF is robust, and in this case we have been mindful of the possibility the company would change hands,” he said.
The investment from the PGF was intended to accelerate Westland’s plan to segregate milk and produce higher value products. It would also retain milk processing on the West Coast and provide new jobs in the region, Pigou said.
The statement from Jones’ office noted that he did not have sole approval rights on any Provincial Growth Fund project.
Under decision-making criteria for the fund, applications between $1m and $20m go to a group of four regional economic development ministers – David Parker, Grant Robertson, Phil Twyford and Shane Jones.
Ministers received official advice on the project from several sources, not just Treasury (which advised against the loan) “and made their decision based on consideration of this full range of advice”.
Federated Farmers
Federated Farmers president Katie Milne is a director of Westland, whose board is recommending acceptance of the Yili offer.
But Federated Farmers national dairy chairman Chris Lewis said questions and close scrutiny needed to be taken over the deal.
“It’s another business getting bought from overseas and one thing you notice is that overseas companies don’t concentrate on dividends,’’ he told news media.
The move might also lead to more NZ companies being sold to foreign companies.
“New Zealand investors and farmers need to focus on strong local leadership with strong balance sheets.
“Fonterra has billions of debt and is now selling off.
“Growth shouldn’t come before balance sheet strength.’’
