Strong Criticism of Global Co Merger ProposalTuesday, Jan 23, 2001
The following criticism of the mega merger raises some serious issues that may stand in the way of progress
of the merger past the Commerce Commission.
Is it illusionary - is it real? Are the academics tilting at windmills?
The latest merger proposal still does not meet the key concern of competition policy - the need to create
a structure within which viable competition for Global Co will be present within two years,
Professor Neil Quigley says in his report, released by the Minister of Agriculture.
Professor Quigley wrote:
- It is hard to reconcile the claim that the proposal will allow retention of single-desk seller advantages in export markets with the claim that a market structure is being established that will allow the emergence of viable competition in the supply of the purchase and processing of raw milk, the supply of milk products to the domestic consumer market and the export of dairy products from New Zealand.
- The failure to establish Dairy Foods, the local milk business half owned by the Dairy Group, on a basis that would allow it to emerge as a viable competitor of Global Co, the failure top provide for price unbundling and tradeable shares, and the allocation of all quota rights to Global Co represented major impediments to the development of competition.
- In its current form, our assessment is that the Global Co proposal has detriments well in excess of the benefits.
- It did not represent the best deal for New Zealand, but it was important that the dairy industry seek authorisation from the Commerce Commission and consider ways of reducing downsides before any legislative action by Government.
- Questions the $310 million dollars in benefits that are claimed to be associated with the merger of the New Zealand Dairy Group, Kiwi Cooperative Dairies and the Dairy Board must be questioned.
- Claimed annual cost savings in the order of $120 million would arise from elimination of duplicated facilities and activities and are achievable from the first year of Global Co’s existence. But the immediate impact of the savings is offset by one-off establishment costs of around $100 million.
- Annual revenue enhancements and productivity improvements in the order of $70 million are expected from the second year with further benefits because of harnessing of synergies between different parts of the industry. But in the earlier proposal the commission accepted benefits in a range from $21 million to $41 million against the status quo, and $46.5 million to $71.5 million through deregulation effects.
- In the absence of further information, we must conclude that the benefits accepted by the Commission under this heading are unlikely to increase.
- A Dairy Board commissioned report estimated that premiums from being a single seller totalled $40 million a year but a later study showed both the methodology and conclusions were flawed.
- It is unlikely that the commission would recognise public benefits larger than $20 million a year.
As dairy farmers how are you going to judge the merit of the proposal?