Goodman, Wattie to fight merger bar

Press, 13 May 1987, Page 41

Goodman, Wattie to fight merger bar

By

NEILL BIRSS

Round one to tbe little fellow: the wheat farmer, the independent miller and baker. But the word from the comer of Wattle Industries, Ltd, and Goodman Fielder, Ltd, is that thei ; bout will continue. Mr 'Pat Goodman, chairman of bom Wattle Industries,. Ltd, and Goodman Fielder, Ltd, said last evening that an appeal would be made to the High Court against yesterday’s decision of the Commerce Commission. This declined the proposal by Goodman Fielder to buy all the shares in Wattle Industries* a move described by both companies as a merger. “We will immediately be lodging an appeal to the High Court against the Commerce Commission’s decision. Our lawyers believe we have strong grounds to support the appeal,” Mr Goodman said. He expressed surprise at the decision, saying the companies over five months had spelled out the advantages of a merger. Mr John Collinge, chairman of the Commerce Commission, said the merger proposal would result in the new company acquiring or strengthening a dominant position in: • Flour milling. • Bread. • Frozen pastry products. • Poultry meat. • Poultry feedstuffs. Wheat is the rock on which Goodman Fielder and Wattle stubbed their toes. Because of the role of bread in keeping the poor alive for centuries, and because it was believed well into this century that a low bread price was essential to prevent riots, wheat and milling have been highly regulated industries for many decades. The wheat farmers and milling interests, whose regulation was much

older than protection for manufacturing in New Zealand, have campaigned against the merger. The big food companies have clearly been overconfident, Wattie’s trimming plants in anticipation of the merger. Goodman Fielder is already the largest food company in Australia and New Zealand.

Mr Cliff Lyon, managing director of Wattie’s, has said 70 per cent of Wattie’s turnover is in products not produced or sold by Goodman Fielder. Both companies have emphasised the need for a large food organisation to

maintain market share in Australia and New Zealand and to expand in other countries.

Edible oils, making products such as margarine, is easily the largest division of Goodman Fielder, itself the result of an Australian and New Zealand merger. But it is the old bread, flour, and wheat sectors of the market the Commerce Commission is determined to guard. Poultry raising is also closely related to wheat production. For Canterbury food firms such as Ernest Adams the blocking df the merger is good news. Executives of Goodman Fielder have said that smaller competing food companies such as Adams are unlikely to grow in the face of the large merged firm. The unspoken premise all round is that of a static market, with little or no population growth. The ready acceptance of this

Wheat the key to rejection

is the saddest fact for New Zealand, recently a pioneering, growing country. Reporting the Commission’s decision, Mr Collinge said no dominance was found in the markets for edible fats and oilsThe Commission was influenced by the withdrawal of the Wattie bid to purchase 100 per cent of Abels, and the subsequent decision by Wattie to sell its 30 per cent share in Abels. The Commission also indicated that it would have found dominance in the ice-cream market had Goodman Fielder not undertaken unconditionally

to sell its interest in New American ice-cream to a company independent of both it and Wattle’s.

However, with deregulation of the wheat and flour industry it was probable that many of the existing independent millers in the South Island would be likely to close, the merged firm gaining market share. There was clear over-capacity in milling, especially in the South Island. The Commission found that the merged company would have a 52 per cent to 60 per cent of the bread market in New Zealand, and a much greater share of sliced bread. It would also have control of wet yeast production as a result of the merger as well as its dominant position in flour milling. Most independent bread bakers were therefore likely to have to purchase these two essential ingredients from their major competitor. Much the same position also applied in the making of frozen pastry products, where Goodman Fielder and Wattie’s produced 60 to 75 per cent of such products. In poultry meat, Wattie had a market share of 70 to 80 per cent. Its strategic position in the supply of breeder stock > and feedstuffs gave it power to make further inroads into the market. Health regulations made it impossible to import fresh or frozen poultry meat from Australia.

Bran and pollard were significant ingredients in the feedstuffs industry and had virtually all the production available to the poultry industry, said Mr Collinge. The merged concern would again be in a position where it was a principal supplier of bran and pollard to its competitors.

• Assessing dominance in the various markets, the Commission examined whether potential competition was a suitable discipline, e.g. whether other substitute products existed, whether a new entrant into the New Zealand market was likely, and whether imports would be likely. The applicants argued that there were public benefits from the proposal and, in particular, that there were efficiencies resulting from the aggregation of the two groups and that economies of scale could be used as a base for assisting the export of New Zealand products overseas.

Although the Commission found that efficiencies would occur, it says it was particularly influenced by the fact that, with dominance existing, there were no means of ensuring such benefits would be passed on to consumers and users. “In relation to efficiencies which might arise from rationalisation of production facilities be-

tween Australia and New Zealand, it was not established to the satisfaction of the Commission that the benefits would flow to New Zealand rather than to Australia,” Mr Collinge said.

The argument that the wider base formed by the proposal would mean that the two companies were better placed to export New Zealand goods was found by the Commission to constitute a public benefit. While accepting this, the Commission questioned the extent to which such benefits were attributable to the merger.

Mr Collinge said that the act appeared to place emphasis on the availability of domestic competition for the benefit of the New Zealand consumer, and that the onus was upon the applicants to convince the Commission that the benefits of such efficiencies and increased exports outweighed the detriments from any such lack of competition.

The Commission found that the dominance in the markets in question was substantial and that the benefits alleged did not outweigh the detriments arising from the dominance.

The Master Bakers of New Zealand (the group representing independent bread bakers) has applauded the Commission’s decision.

A spokesman, Mr John Evans, of Christchurch, manager of the Ireland Group, said the immediate effect would be , the guarantee of competition in the bread industry. “There is no doubt that if the merger had gone ahead, Independent bakeries would have been forced out of business with a resulting monopoly leading to price exploita-

tion of the consumer,” Mr Evans said.

“In fact, the entire food processing industry would soon have been owned by the Goodman Fielder Wattie’s company, with disastrous effects for the consumer.” Mr Evans said Master Bakers of New Zealand was a new group, formed to give group buying and marketing advantages to its members.

“Only 30 per cent of the bread industry remains in independent hands. We aim to ensure that those companies remain strong and competitive. The Commerce Commission decision makes that possible,” he said. In Sydney in December and in Auckland in January the shareholders of Goodman Fielder and Wattie’s respectively voted for the merger.

A reward for the Wattie’s shareholders came in February with news that Wattie’s shareholders would participate in a one-for-three bonus announced by Goodman Fielder — if the merger was approved. The merged firm would be an Australian company.

The merged company would be the thirteenth largest in Australia by market capitalisation. Under the offer, Wattie’s shareholders would receive seven ordinary 50c fully paid shares in Goodman Fielder Wattie for evey six Wattie shares. Wattie’s shares fell 6c to 629 yesterday and Goodman Fielder on the New Zealand exchange was unchanged at 565.

Goodman Fielder shareholders would receive one share in the merged company for each share now held.