How did Murray Goulburn, once Australia’s biggest milk processor and a successful dairy cooperative since 1950, end up being sold to its international competitor, Canadian dairy giant Saputo? In the second of this multi-part series (read part 1 here), Elena Garcia provides some answers.
Dairy is one of Australia's leading rural industries. The latest industry figures show it is a $13.7 billion farm, manufacturing and export industry, comprising 6000 farms and 120 factories that employ 38,000 people.
In mid-2014 Murray Goulburn had 3109 suppliers. Within six months of cutting the farmgate milk price retrospectively, its supplier numbers had dropped 20% to 2200, many of them major milk producers producing millions of litres a year. It had gone from a $44 million profit for the 2015–16 financial year to a $31.9 million loss for the second half of 2016, with net debt up 72% to $677 million.
Although Murray Goulburn abandoned its demand that dairy farmers repay “overpayments” when it retrospectively lowered the price it paid for milk and announced that it would return any repayments already made, farmers loyalty to their cooperative, along with their trust, had been destroyed.
On April 28 last year, the Australian Competition and Consumer Commission (ACCC) began proceedings in the Federal Court against Murray Goulburn. It alleged Murray Goulburn had engaged in unconscionable conduct and illegally made false or misleading representations to its suppliers in forecasting a milk price of $6.05 when it allegedly knew dairy commodity prices were falling globally.
The ACCC also alleged former managing director Gary Helou and former chief financial officer Bradley Hingle were knowingly concerned in Murray Goulburn’s conduct. Internal emails to senior executives show that in August 2015 parts of the business were clearly making significant losses, with commodity sales down by $21 million in just one week. Two weeks later, the same sales were down by more than $23.5 million.
Despite growing industry doubts, Murray Goulburn had continued to talk up its milk price. At the end of April 2016 Helou told the Global Food Forum that Murray Goulburn products were selling well in China and a $6 farmgate milk price “is absolutely doable and feasible”.
Two days later, the Australian Stock Exchange (ASX) put a trading halt on Murray Goulburn shares and its forecast profit was almost halved. Within a week the company slashed its milk price, told farmers they would have to pay back $183 million and Helou resigned.
ACCC Chairperson Rod Sims said: “The ACCC alleges that Murray Goulburn’s conduct had an adverse impact on many farmers who, as a result of its representations regarding the farmgate milk price, had made business decisions.”
Last November, Murray Goulburn admitted to breaking the law before it suddenly dropped its farmgate milk prices. It announced it had reached a settlement with the Australian Securities and Investments Commission (ASIC) for its failure to meet disclosure requirements in the lead up to the April 2016 price cut. The company was fined $650,000 and admitted contravening the continuous disclosure provisions of the Corporations Act.
A class action was launched on behalf of “misled” farmer and investor shareholders. Slater and Gordon senior associate Andrew Paull said: “Thorough analysis of the recent ACCC and ASIC inquiries into Murray Goulburn has strengthened our initial findings that suggest the company misled the market by forecasting profits it could never achieve in the 2015-16 financial year.”
Paull said they will argue Murray Goulburn’s shock profit downgrade on April 27, 2016, was the result of previously overly ambitious and optimistic earnings forecasts amid deteriorating market conditions, “rather than any factors beyond its control”.
“We identified significant inconsistencies between Murray Goulburn’s statements to the market regarding its likely revenue and profits that year and the information available to the company’s management internally,” he said.
An industry up for grabs
On September 21 last year, Murray Goulburn told the ASX it had received a number of confidential, non-binding indicative proposals and it would provide an update at its annual general meeting in October.
Instead, a couple of hours before the meeting started it told the ASX it had entered into a binding agreement to sell all its assets and liabilities to Saputo. Farmers arrived at Murray Goulburn’s annual general meeting in Melbourne on October 27 expecting updates from their board, only to learn the cooperative had already been sold to Saputo.
The farmers were furious. They blasted Murray Goulburn over the decision to sell. But the board argued the sale was the key to Murray Goulburn’s survival. It warned that if the Saputo deal failed, the group's uncompetitive milk price may lead to further milk losses, trigger impairments and covenant breaches and the potential loss of creditors' support.
Dairy farmer Paul Mundy, from Cobram East, was applauded when he told the meeting the board had not made enough "of the very hard decisions that were required" to preserve the processor. “Why is it that we have effectively capitulated?" he asked.
After the AGM Mundy said: "I believe the board should have taken far greater action, much earlier, to secure our milk flow, milk being our most valuable asset ... It appears to us, as suppliers, that there has been a lack of willingness to do so."
Mundy ran for a position on the board but did not have the numbers to win, although he did receive a strong protest vote of about 13% against directors John Spark and Mark Clark.
Mundy said Murray Goulburn could have done more to cut costs and questioned why it had wasted money renting office space in Melbourne's Southbank. He said the company's "opening price", the amount it would pay farmers for milk, was "an absolute disaster. They should never, ever, ever have come out with $4.70 [per kilogram farmgate milk price].”
Furious farmer Brad Adams grilled chairperson John Spark during the meeting: "I want to know why there has been this agenda to sell Murray Goulburn. I want to know why, when [CEO] Ari [Mervis] took over we had 2200 supplier members, we had 2.7 billion litres of milk last financial year, we estimated that we had 2.5 [billion litres] for this year, yet it would appear we have done nothing to retain any of that milk.
"Our company has now been devalued ... Rightly or wrongly we've been ripped off. I've had a knot in my guts all the way down from Cobram today, and it's about time you people took some responsibility for the decisions that you make."
Spark defended the decision to sell Murray Goulburn to Saputo: "Unfortunately, we as a board, on behalf of the shareholders, have had to make a decision which is unpopular. It is not the best decision that any of us would have wanted to make. But we are doing it with the best intention for all of our shareholders and ultimately we are putting it to a vote of our shareholders to see if you wish to approve it."
CEO Ari Mervis also acknowledged that the deal was “perhaps not a universally popular outcome” with shareholders. He told investors the Saputo offer came down to three things: it offered as much certainty as possible, favourable timing, and a competitive milk price.
Outgoing Murray Goulburn farmer director Craig Dwyer said no one could have envisaged a takeover: "When seven dairy farmers from the Cobram area became the first subscribers to Murray Goulburn, each holding 100 shares on the 9th of January, 1950, I am sure they never envisaged this day," he said.
‘The best available outcome’
In Murray Goulburn's ASX statement, Spark said the Saputo deal represented "the best available outcome" for suppliers and investors. "Murray Goulburn has reached a position where, as an independent company, its debt was simply too high given the significant milk loss," he said.
But as the farmers pointed out, offering a low milk price simply encouraged farmers to leave the cooperative to find a better price elsewhere. A $5.20/kg farmgate milk price would not be enough to keep them when competitors were offering more.
Many shareholders at the October AGM wanted to know if there had been other offers. In fact, there had been a number of proposals from other dairy operators, including Bega Cheese, but these proposals were not put to the farmers for voting.
Instead the Saputo deal was presented by the board as a done deal and the only way to rescue Murray Goulburn from its bankers. They emphasised that if anything affected the completion of the deal with Saputo there could be trouble with the banks. Murray Goulburn had $240 million of banking facilities due to expire within 12 months.
Spark said given the company's tenuous economic position, the sale was the best option for unit holders and shareholders.
"I appreciate the last two years have been an immensely challenging period for the cooperative and our loyal suppliers, and am aware that some believe the cooperative should remain a stand alone business," he said. "However, the fact is that tangible, certain benefits will be delivered from the transaction with Saputo and are far above what can be achieved should Murray Goulburn remain in its current form without access to additional capital."
But there were at least two other viable offers with funding that would have allowed the company to continue as a cooperative.
The Australian Financial Review reported in November that the Inner Mongolia Yili Industrial Group Co Ltd, Asia's eighth-biggest dairy company, had been given access to preliminary data but were refused access to full due diligence on the basis that its success might take too long.
Yili had developed a recapitalisation and governance structure that was acceptable to the Foreign Investment Review Board, and had access to capital. Yili's fix would have seen a recapitalised Murray Goulburn with 51% controlled by Yili and the balance held by the farmers. The farmers and Yili would hold an equal number of seats on the board and an independent chairperson would be given the casting vote.
Yili was told there was a timeline that stretched to December and that Murray Goulburn was working towards the announcement of a shortlist of bid candidates at its AGM in Melbourne on 27 October. Instead it was told a deal had been done with Saputo.
Murray Goulburn claimed it had been open to counteroffers, but none of the defeated bidders could match the structure and pricing of the Saputo deal. But the lack of financial information prevented counter offers for the cooperative, as it would have been deemed too risky without appropriate time and information to complete due diligence.
New Zealand cooperative Fonterra, now the biggest milk processor in Australia, had proposed the formation of a "super dairy cooperative" but its offer was rejected as "non-compliant" with the Murray Goulburn board's requirements. Fonterra then complained that re-framing its pitch was made effectively impossible because, like Yili, it was not offered due diligence. In November, Murray Goulburn confirmed that only Saputo actually got to see the numbers.
Instead, as the April 27 deadline for farmers to vote on the Saputo deal approached, the board told the Australian Financial Review on Feb 6 that Saputo was their only option: “Troubled milk processor Murray Goulburn has warned if a takeover deal with Canada's Saputo falls over the group's uncompetitive milk price may lead to further milk losses, trigger impairments and covenant breaches and the potential loss of creditors' support.”
An editorial in The Weekly Times on November 1 summed up the situation: “A proposal by Fonterra for a super cooperative did not appear to get past first base, presumably because Murray Goulburn management was keen on a sale of the whole business. Until now, it had never been disclosed that a super co-op was an option put to the Murray Goulburn board.
“The sale to Saputo may well be the best deal for its investors, but Murray Goulburn has a duty and obligation to lay all the cards on the table to its members — and their forebears — who built the co-op from scratch.
“As dairy farmer and former Murray Goulburn employee Ross Greenaway passionately told Friday’s annual general meeting, the cooperative’s board needed to take its dairy farmer members on the journey and disclose what other deals were on the table for the sake of transparency.
“A super co-op might have had some merit, but it never got the chance to be tested. Well-resourced and well-managed agricultural co-ops have worked successfully in Europe, the US and New Zealand. Historically, dairy farmers have wanted ownership and some level of control of their processor and the co-op proposal may have fitted the bill.”
The auction that was supposed to protect the interests of the farmers merely allowed their processing assets to be sold to pay off the banks. It handed all their assets and milk supply over to a major corporate competitor at a bargain price, and cut out any chance of continuing as a cooperative, a culmination of the corporatisation process that started with its launch onto the public equity markets in 2015.
[Elena Garcia is a free range cattle farmer on marginal land in western Queensland and a co-author, with Alan Broughton, of Sustainable Agriculture versus Corporate Greed available from Resistance Books.]