Westland Milk facilities producing dairy. Photo/File.
"We had a proud history, we were all proud of the company. Right from farmers to the workforce to directors, we were all on the same page to do the best we could."
Fourth generation West Coast dairy farmer Murray Stewart is recalling why the century-old Westland dairy cooperative, poised for sale to a Chinese mega-company, decided not to join the 2001 industry merger that created Fonterra.
He was a Federated Farmers leader at the time and says going it alone was a no-brainer for the West Coast dairying community.
Fast forward 18 years and that pride is a dusty memory. These days Stewart says he just feels cornered and frustrated.
"We've been jammed in a corner and this looks like the only way out. A number of us feel very frustrated that we've been driven into this corner.
"(Staying independent) was the right thing at the time, but in the past 10 or 12 years, our directors and management have gone off on their own tangents.
"Instead of directors actually setting the strategy and goals for the company, they let management do it and then haven't pulled them up when they haven't delivered what they said they would."
On July 4, the day Americans celebrate their declaration of independence from Britain, Westland's farmer-owners will be voting on whether to lose theirs.
Heavily indebted and in recent years lagging other dairy companies in milk payout to its farmers, Westland has called for the doctor. For its 420 or so farmer-owners the medicine is bitter. The price of new capital will be the loss of the West Coast's 150-year-old cooperative dairying legacy.
But with their livelihoods on the line, they can't ignore a deal their directors tell them is a peach.
China's biggest dairy company, state-owned and Shanghai stock exchange-listed Yili is offering $3.41 per farmer share, while Westland's own independent advisor Grant Samuel values them at between 88c and $1.38. The average Westland farmer stands to get a cash payout of $500,000.
Powerful added incentives are that Yili, which owns the Oceania dairy company in South Canterbury, has committed to pick up all existing milk supply and to match Fonterra's farmgate milk price for 10 years.
There are other pressures to consider too.
The country's biggest rural lender, ANZ, is understood to be well-exposed in the region and is said to be taking a close interest in this conditional sale process.
(Less than a year ago Westland successfully applied for a $10m loan from the Government's Provincial Growth Fund. It soon emerged Treasury had counselled against the loan partly because Westland couldn't get a bank loan to fund a value-adding processing project. The loan offer was cancelled with the Yili proposal, the commercial terms never revealed.)
It's predicted the West Coast dairy property market, all but dead because of Westland's low payouts, would perk up with the sale.
Stewart, who would receive about $680,000 for his shares, says the prospects for Westland trying to continue alone are grim.
He says they've been told earnings retentions of 20c-40c per kg milksolids would need to be made. With Westland's milk payout lucky to make $6/kg - the industry benchmark for a farm to make an operating profit - that would be tough. Some farmers are still trying to recover from the global milk price slump five years ago.
Another sweetener, Stewart says, is that Yili, if its Oceania supplier contracts are a guide, would pay 85 per cent of a season's milk price as an advance and 15 per cent in the winter. Westland pays 60 per cent. That means as Yili milk suppliers they'd get an extra $1.80/kg at the toughest feed time of the year.
Stewart takes a dim view of the surprise replacement section in the Westland sale scheme booklet that reveals six executives will receive cash bonuses of $1.64 million if the deal with Yili is successful.
This undertaking was not in the original scheme. The first 15 per cent will be paid upon entry into the implementation of the transaction, a further 60 per cent paid upon actual implementation and the remaining 25 per cent six months after the deal is completed.
Chief executive Toni Brendish, who joined in 2016, was paid more than $1m last year and will receive $680,000 of the cash bonus.
Milford Asset Management director and Herald columnist Brian Gaynor has said many Westland shareholders are "appalled" by the cash bonuses because the management team has contributed to Westland's poor performance. Gaynor says there is a now a strong incentive for management to aggressively support the Yili offer instead of looking for ways to keep Westland under New Zealand control.
But major shareholder, Dairy Holdings, says bonuses aren't a surprise in a takeover.
"The concept of putting a golden handcuff on key executives is pretty standard. We've not seen the detail of what they are made up of but this is fairly standard in a takeover to make sure the day after there are still people to run the company," says chairman Greg Gent.
He says Brandish arrived "well after Westland got into trouble".
"She couldn't take responsibility for what's happened in our view. The chief financial officer likewise."
Dairy Holdings has said it will vote for the sale.
The board of another major shareholder, state-owned Landcorp, met this week and was expected to discuss the way it will vote. Its cash payout would be about $11m.
Chairman Dr Warren Parker has since declined to comment on which way the country's biggest farmer will vote.
Southern Pastures, which says it is Westland's biggest shareholder and milk supplier, intends to abstain from voting to give greater weight to the votes of small shareholders.
Farmer Murray Stewart, who says he hasn't made up his mind how to vote yet but is "leaning to no", is unhappy with Westland chairman Pete Morrison, a major shareholder.
"He's had his eye off the ball for 18 months trying to find a sale. He should've been making the cooperative work and holding the management to account."
Stewart and his son Andrew, who sharemilks on one of the family's three farms, claim farmers have been "fobbed off" by the company's leaders when they've asked questions at sale proposal meetings.
The younger Stewart thinks the vote will "scrape through".
Like his father, he'll be sad to lose the cooperative, but says the deal with Yili "would give us some options".
"It takes away some of our risks. We have been carrying a lot of the risk and the risk around the market product (the costly pursuit of value-added production). We can just go back to worrying about our own farm business."
He's "neutral" about foreign ownership and "kind of understands" the management has been offered an incentive to stay.
Like his dad, he would've liked to know more about a Fonterra approach to Westland before directors decided on a shortlist of suitors. Interested parties were never revealed but the cooperative Fonterra has confirmed it unsuccessfully approached Westland before the official search for new capital began.
The Herald understands at least one other New Zealand-based processing company did its sums over Westland but walked away.
Andrew Stewart said there was some concern among shareholders as to what would happen when Yili's 10-year commitments expired but Oceania suppliers seemed to be happy with their Yili contracts.
"We'll end up being a customer to a processor so we have to make sure we do all the things we need to so they keep picking up our milk. Maybe we'll have to change our attitude a bit."
Even if farmers vote to take the money and run, the deal needs Government approval via the Overseas Investment Office. Implementation of the sale scheme also needs High Court approval under the Companies Act.
The vote on July 4 in Greymouth requires 75 per cent support from votes cast, and 50 per cent support from all eligible votes.
The New Zealand sharemarket reached its highest level in a month.