Richmond has nothing to fear, says victor PPCS

By LIAM DANN

Like many great battles, the end - anticipated for so long - still came as a shock. After nearly eight years of relentless pursuit, southern meat processing giant PPCS finally won control of Hawkes Bay rival Richmond this week.

New Zealand's meat industry is now bracing itself for the closest thing to a mega-merger it has seen.

The Richmond-PPCS partnership will have a turnover of more than $2.2 billion - twice that of its nearest rival, Invercargill's Alliance. It will account for nearly 40 per cent of the nation's sheep and beef exports.

But this is not a drive towards a giant Fonterra-style meat corporation, says PPCS chief operating officer Keith Cooper.

In fact, this may be as far as industry consolidation will go.

"We've never advocated a Fonterra model," he says. "You may well see three major players and a range of smaller players. That will be a good competitive balance."

Four big companies have traditionally dominated the industry: Richmond and Affco in the north, PPCS and Alliance in the south.

Affco chief executive Tony Egan agrees that this is the end of a process, not the beginning.

"There has been some consolidation over the last decade and this is the pinnacle of that change," he says. "It's not likely that we'd be consolidating with Alliance."

Alliance management declined to comment.

The Court of Appeal decision on Wednesday reinstating voting rights on a disputed block of shares left PPCS controlling 62.94 per cent of Richmond.

The judgment appears to have taken Richmond staff by surprise.

Insiders say there was a genuine belief in the Hawkes Bay that the Court of Appeal would rule in their favour.

It did not. Now, barring an unlikely challenge to the Privy Council, Richmond must submit to the vision of a company that by its own admission has some unique and firm views on the way meat companies should be run.

Understandably, Richmond management was reluctant to comment.

Cooper does not believe those in the Hawkes Bay, particularly farmers, have anything to fear.

PPCS' dogged efforts to gain control of Richmond should be seen as a vote of confidence in the company, he says.

"They've got a quality brand and a quality image around the world."

This is not about merging PPCS and Richmond into a single entity. "With 63 per cent it can't be."

PPCS is not about to slash and burn, says Cooper. Cost reduction is the way of the world but the merits of consolidating various functions will be openly debated.

"With 63 per cent everything has to be commercially validated ... Even at 100 per cent ownership, if that ever was the case, everything has to stack up commercially.

"It has to make financial sense to integrate systems or you don't do it.

"We run a cost-efficient operation. They do things slightly differently," he says.

In fact, it is PPCS that has always done things differently.

The co-operative was started in 1947 as a marketing company. It was set up by a group of farmers who were not comfortable with just supplying product to an overseas entity and being paid for it, says Cooper.

"What they wanted to do was get the actual market returns by marketing their own product. That ethic still prevails today."

So while other meat companies took advantage of single-seller organisations to market New Zealand lamb overseas, PPCS chose to go it alone.

Cooper thinks "go it alone" sounds like a negative term.

"What we've tended to do is maintain our own brands and our own marketing strategies."

It means they cut out the middlemen and started dealing directly with big international retailers.

PPCS does not want its products traded as a commodity.

"If that happens we haven't done our job right. We haven't made friends with brokers."

The strategy fits neatly with the wider goal of adding value to products before exporting them, he says.

"And we've done that on our own, because why would we want to share our plans or strategy with a competitor that is competing with us for procurement?"

At almost every level PPCS has applied a classic Kiwi do-it-yourself philosophy. It built its own computer systems to avoid paying licensing fees and developed its own robotics and machinery and retained the intellectual property.

"We've always wanted to be in charge of our destiny," Cooper says.

"It's a philosophy. We don't want to be subject to outsiders that can charge us a lot of money."

An attitude of self-belief runs through much of the PPCS rhetoric.

It is an attitude that is sometimes perceived as arrogance, particularly by opponents in the Hawkes Bay.

"We've always said we don't want to be average," says Cooper, explaining why PPCS avoided joining its peers in single-seller export groupings.

"We want to strive for the optimum performance. We don't see the benefit of being in single-seller groups.

"You end up being averaged out. You get the same return as the others so there's no point of difference."

Just how good PPCS' optimum returns are is difficult to determine. As a farmer co-operative it can keep its financial statements out of the public arena. What little it will reveal looks impressive.

Total revenue has nearly doubled in 10 years, rising from $600 million in 1992 to $1.1 billion last year.

In the decade the company has also returned nearly $140 million in dividends (or rebates) to its 12,000 farmer shareholders through the pool system.

That system gives farmers the option of putting 10 per cent of their stock payments into an investment pool.

At the end of six months they get the 10 per cent back plus a rebate determined by the company.

"So we are a bit different," Cooper says. "We're not a group of executives or shareholders or any damn thing. We're owned by a group of farmers who have seen the success of the co-operative model."

A belief in farmer ownership was one of the key drivers for going after Richmond in the first place.

"It was about farmers owning the assets and ensuring that farmers were served first before other shareholders and overseas people," he says.

"If you've got farmers in charge of their business then you're accountable to them and it goes back to them."

That may not look like such a great plan if you are a North Island farmer with no shares in Richmond.

All the cost savings in the world will not mean a thing to North Island farmers if they don't share in the returns. The solution could be to introduce the PPCS model in the north, Cooper says.

"If you ran a pool system processed through Richmond it would enable farmers to have ownership of their assets."

It would be no problem if they controlled all of Richmond, but Cooper says it is still possible with the present structure.

The Richmond saga

1996: PPCS takes its first stake in Richmond, acquiring 1.4 per cent.

1997: Meat Board opts to sell 33.4 per cent Richmond stake. Court blocks PPCS purchase. Shares sold to investment company HKM Nominees.

1999: PPCS buys into HKM Nominees, says it wants 51 per cent of Richmond.

2000: Richmond board rules PPCS breached constitution. Orders stake sold. PPCS/HKM sell to Active Equities company Hawkes Bay Meat. PPCS provides Active Equities with finance for the deal.

February 2001: Richmond lists on stock exchange.

May 2001: PPCS buys 16.75 per cent Richmond stake, says it wants 60 per cent.

June 2001: PPCS buys stake in Hawkes Bay Meat. Deal gives PPCS control of 52.5 per cent of Richmond.

August 2002: High Court case begins to determine legality of PPCS stake.

November 2002: Court rules PPCS must forfeit 6.9 million Richmond shares. Voting rights on a further 14.6 million shares will be forfeited unless PPCS succeeds with full takeover offer for Richmond. PPCS appeals.

January 2003: PPCS mounts full takeover offer at $3.05 a share.

May 2003: PPCS takeover closes with 69.15 per cent stake. Without voting rights on over half its stake PPCS cannot take control of Richmond.

July 2003: Appeal Court hearing begins.

This week: Appeal Court rules that share forfeit is sufficient penalty. Voting rights are restored. PPCS takes control.