30 Oct 2017

Change Is The Only Constant

Went along to my first MG Co-operative AGM yesterday – the 69th and last! Memorable for many reasons, particularly the frustrations of shareholders at the Chairman’s insistence of the need to accept the Directors’ guidance that selling all assets to Saputo was a great outcome.

While the deal is not yet locked away, Saputo has tried to stop anyone else with an ‘exclusive dealings’ clause that precludes the Co-operative from talking to other interested parties for some time to come – probably about when it has run out of liquidity!

Next step for shareholders is a ballot at which >50% of votes need to be in favour. The outcome of the vote is naturally unknown, but both the Chairman and the Managing Director repeatedly said the business was all but impossible to run profitably with the low milk volume and high debt levels. So unless there is an alternate proposal soon, by the time the early 2018 vote comes around, it is difficult to see that any other viable option will be available, and white knights don’t drop out of the sky too often in this low margin industry!

So best assume Saputo will own all MGC assets before 30 June 2018 and we will have a new dominate player in the Australian Industry – circa three billion litres of milk in Southern Victoria and capacity to process four billion litres. MGC will be a branch office of a very successful Toronto listed company, with total revenues greater than $9 billion Canadian dollars and earnings before tax and depreciation (EBITDA) greater than $1.3 billion Canadian dollars.

Like many, I’m not sure I can comprehend the full impact but I do recognise that a weak co-operative with an unstable business plan, and management team suffering from a siege mentality, is not good for the industry. Can only look forward to the fresh air that a well-capitalised outward looking global player will bring.

I’m unconvinced that the sale process was ideal for wet shareholders (the capital markets seemingly didn’t like the outcome for unit holders) as there were other options available that I doubt were explored fully, for whatever reason.

There was one viable alternative that would have retained influence that was more direct and controlled by wet shareholders suppliers; however it is what it is, and the industry quickly needs to make whatever adjustments are necessary to move on.

As for immediate FMP support, while it has some way to play out, it seems that the Co-operative is requiring Saputo to support the FY18 FMP by at least 80 cents/kg MS ($114 million) as the business model cannot deliver competitive returns as it is now being run. It really is a case of the buyer coming in and picking up the pieces.

The extraordinary admission by MGC management that paying an FMP of $5.20/kg MS in FY18 will be a struggle confirms Burra’s decision to move away and build its own stable model that provides sustainable market returns and certainty to our Supply Partners as they make day-to-day decisions. A competitive opening base price for our Gippsland centric supply partners, the 40 cent commitment bonus, and an October Step Up are the initial indicators, and I look forward to continuing to work with you and delivering more in the future.