Dialogue: Time to simply cut losses in apple fiasco

By FRAN O'SULLIVAN

Sir Ron Brierley is no slug when it comes to taking a cold hard look at his company's investments and calculating their risk/reward ratio.

Brierley has been in the maelstrom plenty of times in his career.

But it is hard to fathom why he does not simply advise his local boss, Tony Gibbs, to cut GPG's losses on the Enza affair rather than dig further into a public relations hole.

GPG, after all, has only $6 million of its $1 billion investments tied up in the New Zealand apple exporter.

But the vexed row between Enza and its apple growers over just who should pick up the tab for $50 million of foreign exchange losses must be taking most of Gibbs' time.

Sure, GPG's Enza play must have looked a great little arbitrage when Gibbs wheeled it up to board level last year.

By exploiting orchard ownership rules, Gibbs and FR Partners' Bill Birnie were able to get their hands on a 40 per cent control stake in what was then still effectively a statutory monopoly.

The trouble is, Enza's financial situation was far worse that either GPG or FR Partners expected. Foreign exchange losses have ballooned far beyond the ability of either Enza or its grower clients to digest without threatening their respective financial futures.

In March, Brierley said GPG had contributed a "disproportionate" level of input relative to its $6 million investment.

But it accepted this "within reason, as our contribution to the rescue of an important national industry".

The resultant brinksmanship between the Government, Enza and its apple-grower clients over just who should pick up the tab is now threatening the viability of the industry.

The fiasco is also putting the spotlight on the sequencing of the deregulation of New Zealand's apple-exporting industry and inept behaviour by all the parties: Government, Enza and growers.

What is clear is this:

First, Enza had no right to deduct $19 million of 2002 foreign exchange losses from current grower payments.

While Solicitor-General Terence Arnold is less fixed on the 2001 situation, his Crown Law opinion relating to the 2002 losses is categorical.

If Enza is to come out of this affair with its commercial credibility intact it must realise that hitting up growers with next year's projected losses when they are already under siege will simply sway public anger against the company.

Second, the apple orchardists will inevitably end up bearing some of the forex losses. The company's balance sheet does not appear sufficiently strong to manage out the losses without requesting growers to take on some burden in line with previous policies.

A poor growing season, which has seen volumes reduced by close to one-third, has lessened the industry's ability to carry the forex losses through in any case without threatening grower livelihoods.

At some stage soon, the bankers will start to call up some outstanding loans and force orchardists to realise their assets before Enza hits them up with further forex losses.

Third, the Government's implicit threats to put Enza into statutory management or legislate the forex losses directly against shareholders' funds is not the correct way to do business.

Agriculture Minister Jim Sutton should have called a full Beehive conference on this weeks ago and put the October 1 deregulation of the industry on hold until a settlement is negotiated between the parties.

Such a settlement might indeed entail the Government's tendering some financial assistance to the industry by spreading the losses over five years through a growers' levy as Enza has suggested, together with a contribution from the company.

GPG and FR Partners are experienced hard- ball players.

But the balance of public opinion is weighted towards a settlement.