One of New Zealand’s top dairy co-operatives is on the verge of demutualising.
On 4 July, Westland Milk Products shareholders voted in favour of a proposal to sell their shares to Hongkong Jingang, a wholly owned subsidiary of Inner Mongolia Yili Industrial Group. The Chinese company will pay NZ $3.41 (£1.80) per share. A total of 2,494 votes were cast in favour of the scheme, with 165 against.
Westland was formed in 1937 following the amalgamation of a number of small co-operatives within the Westland region including Kokatahi, Waitaha and part of the Arahura Dairy Companies. The organisation processes around 3% of NZ’s milk, but fell into serious debt and was unable to pay a competitive rate to farmers in recent years.
As part of the new deal, shareholder farmers who are also existing suppliers will have their contracts guaranteed by Yili, at a price comparable to Fonterra’s minimum rate for 10 seasons.
“When the Board initiated the strategic review process, we did so with the full understanding that all Westland farming families needed to have a competitive milk payout. We know this has been, and is, a driving need for all shareholders,” said chair Pete Morrison.
“This proposed transaction will secure a competitive milk pay-out for at least 10 seasons for all of our existing shareholders and ensures that all of our existing shareholders’ milk would be picked up for 10 years.”
Mr Morrison said that board believes that Yili is a good fit for Westland as it “provides a very strong route to market as one of the world’s leading dairy producers”.
He added: “The Board recognises that the vote today is an important milestone in Westland’s history. While Westland will cease to be a co-operative, the Board believes the proposed transaction represents the best available outcome for shareholders.”
In 2002, NZ dairy giant Fonterra made a merger offer to Westland, which was rejected. Fonterra had talks with Westland more recently as well to explore co-operative solutions but no agreement was reached.
Responding to the announcement, Craig Presland, chief executive of Co-operative Business New Zealand pointed out that co-ops continued to play a key role in the country’s economy. In 2018 the apex body awarded Westland the Co-operative of the Year accolade.
In a blog post examining what had happened at Westland, he warned that the co-op business model was about member (shareholder) ownership and control of the business, not investor ownership and control.
He said: “The challenge here is to balance capital retentions with annual pay-outs appropriately, while prudently investing in capital projects such as new or upgraded plants. This will ensure volumes can be processed efficiently and into value add products, while investments must provide returns above the weighted average cost of capital. Placing too higher portion of earnings into annual milk pay-outs, and not retaining enough for future capital projects and/or investments, can only lead to increased bank borrowings which can prove to be disastrous.
“Any poor performance from co-operatives due to capital investments made, abandonment of retained earnings policies and poor market investment decisions has no relationship with the co-op business model. It has more to do with wise decision-making, good governance and effective leadership. Capital raising appears to be more of an issue with agri-producer co-ops as processing capacities have needed to match rising volumes – milk and kiwifruit being two good examples. One could also argue that dairy plants cost a lot more to build and commission than retail stores, banks and offices.”
The Westland acquisition forms part of Yili’s ambition to grow both its domestic and global businesses, with the vision to become “the most trusted healthy food provider in the world”. The company owns more than 130 branches or subsidiaries.
Australian former dairy co-op Murray Goulburn adopted a similar route, demutualising in 2018 after being sold to Canadian dairy giant Saputo.