Proposed Joint Venture Fine Wool Company

Merino New Zealand And Wrightson Announce Proposed Joint Venture Fine Wool Company

Merino New Zealand and Wrightson have announced that they are investigating the formation of a joint venture fine wool company. A Heads of Agreement outlining the key features of the proposed new company has been signed by both parties.

John Brakenridge, Chief Executive of Merino New Zealand, says the proposed new company will be involved in the sales and marketing of New Zealand merino. Key objectives will be to maximise grower returns; reduce production, delivery and supply costs; promote production efficiencies and increase demand for merino fibre.

¡§Under the proposal, a new joint venture company will be formed with Wrightson. It would involve commercialising the existing Merino New Zealand activities and combining these with Wrightson¡¦s fine wool business. We see this as the best way to build on the strategies we have already employed to position New Zealand Merino as a successful global brand.

¡§Wrightson is the country¡¦s largest wool broking firm, with a long and successful history in the merino business, and it currently handles over 70 per cent of the New Zealand merino clip. Wrightson agrees with the McKinsey view that the traditional wool broking system must change, and that new initiatives ¡V such as this proposed joint venture ¡V are required. Their involvement would bring significant benefits to growers and the New Zealand Merino brand,¡¨ John Brakenridge says.

¡§The new approach, which is in line with the McKinsey Report¡¦s recommendations, would allow growers to control their own destiny.¡¨

Under the proposed new structure, growers would retain 100 per cent ownership of Merino New Zealand Incorporated, which will be the ¡§industry good¡¨ organisation, charged with administering and distributing the merino-specific levy. Grower interests would also have 100 per cent ownership of a holding company, which would hold their shares in the joint venture entity. Growers would initially have four seats on the new company¡¦s board, with two for Wrightson-appointed directors.

The decision to have grower shares in the joint venture company held by a holding company would ensure growers were able to positively contribute to the direction of the company, while also giving it stability in terms of shareholders.

Mr Brakenridge says the proposed structure is seen as the most effective path forward in terms of taking a new commercial direction while retaining an independent ¡§industry good¡¨ entity owned by all merino growers.

Wrightson Managing Director Allan Freeth says the proposal to establish the new venture offers a unique opportunity for New Zealand¡¦s merino industry.

¡§This is a chance for us to take the industry forward in a joint venture which combines the strengths of Merino New Zealand and Wrightson to further enhance and develop the New Zealand Merino brand internationally,¡¨ says Dr Freeth.

¡§Our skills and experience as commercial operators, and our infrastructure ¡V combined with the market talent of Merino New Zealand and the support of merino growers ¡V would create significant new market opportunities for growers.

¡§Formation of the joint venture would be significant for Wrightson, involving the transfer of our total merino business to the new company. We are confident it would bring significant benefits to the merino industry and to our own shareholders,¡¨ he adds.

Merino New Zealand¡¦s regional chairs met with the Merino New Zealand board in Christchurch recently to go through the proposed new structure, and to ratify the Heads of Agreement between Merino New Zealand and Wrightson.

John Brakenridge says the five regional chairs endorsed the organisation¡¦s move towards a new commercial direction through the proposed joint venture with Wrightson, and will now take the proposal back to their regions for consultation with growers prior to a formal vote being taken in April.

¡§All growers will receive a letter from our chairman, John Perriam, outlining the background to this new venture, and a list of commonly asked questions. This will be followed by a more detailed document, which will provide comprehensive information on the proposed changes, and the voting papers. We are also in the process of setting up an 0800 line to answer grower questions.¡¨

Mr Brakenridge and Dr Freeth say that the Heads of Agreement between Merino New Zealand and Wrightson does not commit the parties to establish the proposed joint venture, but rather, provides a framework for detailed negotiations and investigation of all legal and commercial implications and requirements. The Heads of Agreement has been approved by the Implementation Project Team and the New Zealand Wool Board.

ENDS

1. Up until now you have used the name Newco to refer to the proposed new commercial company. What will the names of the commercial company and the industry good entity actually be?

A name for the proposed new commercial company has not yet been finalised, however it is likely that it would be called ¡¥Merino New Zealand Limited¡¦ or a slight variation of this name, to enable the company to continue to benefit from the strong positioning that the current name and brand enjoy. For the purpose of this document we will refer to the proposed new company as Merino New Zealand Limited.

The industry good entity will be known as Merino New Zealand Incorporated.

2. How will the current ownership and roles of Merino New Zealand Incorporated and Merino New Zealand Limited be affected by the proposed changes?

Merino New Zealand Incorporated will remain 100% grower owned. Merino grower¡¦s shareholding in the new company, Merino New Zealand Limited, will be held on their behalf via a holding company.

The ¡¥industry good¡¦ role currently undertaken by Merino New Zealand Limited will transfer to Merino New Zealand Incorporated under the proposed new structure. Merino New Zealand Limited will undertake commercial activities such as sales and marketing.

The Wool Board is intended to exit as a shareholder of the current Merino New Zealand Limited, however they will still have an important liaison role to play with both the industry good and commercial entities until the time that new legislation for industry good activities is in place, and when reserves and shares held on behalf of growers are able to be distributed. It is agreed that until this happens that the Wool Board should have a presence in both the industry good body and the commercial company.

A diagram showing how the transition from the current structure to the proposed Fine Wool structure could evolve, and what the roles of the entities could be from 1 July 2001, is given below.

3. Why has Merino New Zealand chosen to work on the project with Wrightson?

Wrightson is the leading broker of merino fibre in New Zealand, and has worked closely with Merino New Zealand to encourage and facilitate new initiatives and selling options. The proposed new company has similar principles to Wrightson¡¦s Integrated Fibre Management strategy of increasing grower returns, matching grower production with specific processor requirements, creating efficiencies that benefit both producers and processors, and building international demand for merino fibre.

The combination of Merino New Zealand¡¦s marketing expertise and Wrightson¡¦s skills, experience and infrastructure, would bring significant benefits to the New Zealand merino industry.

4. Why might the compulsory levy be set at 2.75%?

The McKinsey report recommended that the compulsory levy be reduced to 1% from 1 July 2001 on the basis that this 1% would be across all sheep products, and for this to be used to fund Research and Development (R) projects. The report also recommended that of the 1% collected, 0.25% go to Sheepco for generic sheep R, and that the remaining 0.75% be allocated to Merino New Zealand Incorporated for merino specific R

The Merino New Zealand Board believes that a 1% levy is insufficient to maintain the industry good R, and innovation programmes currently being undertaken, and has therefore proposed a 2.75% compulsory levy.

The Wool Board is currently undertaking a detailed review of the McKinsey recommendation on levy, to determine whether the 1% recommended is in fact sufficient. This review will also consider what percentage of a compulsory levy it is appropriate for Merino New Zealand Incorporated to receive.

Merino growers will be given the opportunity to vote for the setting of a 2.75% levy.

5. What will the 2.75% levy be used for and how will it be allocated?

The levy funding received by Merino New Zealand Incorporated will be available to any organisation on an openly contestable basis for projects that meet the industry good criteria. While Merino New Zealand Limited would seek to put forward applications for industry good projects that it undertakes, there would be no guarantee of any specific level of funding being made available to Merino New Zealand Limited, and it is intended that Merino New Zealand Limited would not be dependent upon receiving a share of the levy funding in order to ensure its commercial viability.

Merino New Zealand Incorporated is currently in the process of putting together an advisory group to determine criteria and priorities for industry good funding.

6. Merino New Zealand Limited is intending to charge growers a margin on wool sold through its catalogue ¡V what do we get in return for this?

Merino New Zealand Limited would be intending to charge a margin for its services. However it is also intended that in return Merino New Zealand Limited would offer significant additional benefits to growers. We have called these benefits to growers the ¡¦points of difference¡¦. The intended points of difference are:

„Y Consistent delivery over time of a better net return on your wool ¡V for example, through increased supply chain efficiency.

„Y Continuance of marketing and R, within an international infrastructure, and further development of the New Zealand Merino Brand.

„Y The best people - leveraging off their industry and market knowledge, their established relationships with both growers and the market, and their talent.

„Y Optimisation Model, providing on farm productivity advice and utilising market knowledge.

„Y Superior range of selling solutions including branded contracts and futures, allowing for better risk management.

„Y Access to the New Zealand Merino Brand ¡V the intention being that only merino fibre purchased through the Merino New Zealand Limited catalogue would be eligible for the New Zealand Merino brand.

„Y Internet solution to provide an on-line Merino grower community, and to provide on-line productivity and selling solutions.

„Y An ability to invest in new developments, and to generate economies of scale and scope.

„Y Strategic investor partners with the ability to influence the value chain, allowing for the development of both national and international network contacts and grower access to the market.

„Y Equity opportunities for growers and the ability to earn off farm dividend income.

„Y Expertise in logistics.

„Y Establishment of a ¡§Club¡¨ ¡V a community of merino growers and commercial partnerships.

„Y Recognition as the ¡¥Fine Wool Company¡¦ giving access to the broader wool industry through the likes of biotechnology, Sheepco, and R funding.

7. What control would growers have under the proposed structure?

Under the proposed changes Merino New Zealand Incorporated will continue to be 100% grower owned, and will have total control over the distribution of the levy funding allocated to it for merino industry good projects. The holding company for grower interests in Merino New Zealand Limited will also be 100% grower owned, and growers would be responsible for appointing Merino New Zealand Limited directors. Directors representing growers would initially have four seats on the Merino New Zealand Limited Board compared to two seats for Wrightson appointed directors. Any subsequent changes to the number of directors on the Merino New Zealand Limited Board would require shareholder approval.

8. Will the current marketing programmes be continued?

It is a principle reflected in the Heads of Agreement for the proposed new company, and the proposed licensing of the brand to the new company, that the value built up in the brand by Merino New Zealand be maintained and built upon.

9. How will directors be appointed to Merino New Zealand Incorporated?

There will be no change to the way Merino New Zealand Incorporated directors are appointed. They will continue to be appointed on a regional basis.

10. How will directors be appointed to Merino New Zealand Limited?

Merino growers would be represented by four directors on the Merino New Zealand Limited Board, and Wrightson will be represented by two. It is intended that all merino growers would be given the opportunity to vote for three of these grower representatives with the fourth director being an independent director appointed by the other three directors. These directors would also act as directors for the holding company representing the growers shareholding in Merino New Zealand Limited.

11. Will there be a transition period before growers are able to vote for directors for Merino New Zealand Limited and the holding company?

The initial grower investment in Merino New Zealand Limited, via the holding company, would come from the Wool Board. Until the Wool Board is in a position to distribute reserves to growers it remains legally responsible for these funds. Discussions will therefore take place between the current Merino New Zealand Board and the Wool Board as to how best to appoint directors to Merino New Zealand Limited and the holding company during the transition period.

12. Why would we need to have a holding company for our shares in Merino New Zealand Limited, couldn¡¦t we hold shares individually or through Merino New Zealand Incorporated?

There are a number of reasons a holding company would be necessary as an investment vehicle for growers:

„Y By having the grower shares in Merino New Zealand Limited represented by a single entity, merino growers would be able to positively contribute together to the direction of the company.

„Y Individual grower share ownership issues would be transacted outside of Merino New Zealand Limited, ensuring maintenance of grower influence and shareholding in the commercial company.

„Y The independence of the ¡¥industry good¡¦ Merino New Zealand Incorporated would ensure that commercial principles are maintained within the commercial company, Merino New Zealand Limited.

13. How would shares in the holding company be traded?

Specific details have yet to be determined. It is proposed that holding company shares be allocated to individual growers after three years, based partly on the basis of levies paid for the three years ending 30 June 2001, and partly on their support of the commercialised Merino New Zealand Limited over its first three years. Provisions will be put in place to ensure holding company shares can only be held by genuine merino growers and it is likely that maximum shareholding and voting limits per individual grower will also be put in place.

A final decision on the allocation of holding company shares to individual growers can not be made until such time as the Wool Board has agreed with government a formula for the distribution of reserves. Distribution of holding company shares would then be subject to the distribution policy agreed.

14. I am not currently a Wrightson client, how would Merino New Zealand Limited accommodate this?

Merino New Zealand Limited is proposed to be a new commercial company, that is majority grower-owned and provides value adding services, including wool selling solutions to all Merino growers, not just Wrightson clients.

Merino New Zealand believes that the points of difference offered by the new company would provide compelling benefits for all growers.

15. Will other parties be considered as shareholders?

Merino New Zealand and Wrightson have agreed to investigate the introduction of other parties to Merino New Zealand Limited.

Other parties would only be invited to subscribe in Merino New Zealand Limited, if it could be clearly demonstrated that synergy opportunities between the party and Merino New Zealand Limited exist, and that they have the ability to add value to Merino New Zealand Limited¡¦s business.

Any decision to include other parties would be the responsibility of the new Merino New Zealand Limited Board and would require shareholder approval.

16. Would management be given a shareholding in Merino New Zealand Limited?

Allocation of shares to management as part of a remuneration package has become common practice in many organisations. The current Merino New Zealand Board and Wrightson both believe that it is essential that the management of Merino New Zealand Limited be incentivised to grow the company. One possible way of achieving this could be through the adoption of a performance based Management Shareholder Scheme.

The details of how best to incentivise management to grow the company, and the nature of any schemes linked to this, would be the responsibility of the new Merino New Zealand Limited Board to determine, once appointed.

17. Who will own the brand?

The intention is that the New Zealand Merino brand will be owned by Merino New Zealand Incorporated on behalf of all merino growers. It would be licensed exclusively to Merino New Zealand Limited, who would continue to promote the brand and invest in it. Provided certain performance related conditions were met, ownership of the brand would transfer to Merino New Zealand Limited after 15 years.

18. You have indicated that there will be a vote on ¡¥ring-fencing¡¦ merino growers reserves, will a majority vote on this guarantee our reserves will be protected?

As with the level of compulsory levy, the fate of reserves is an issue to be determined by the Wool Board. The current Merino New Zealand Board firmly believes that merino growers, and only merino growers, should decide on how reserves belonging to them are utilised. The opportunity therefore now exists to send a strong signal to the Wool Board of merino growers¡¦ wishes.

19. What will happen to PAC under a commercialised Merino New Zealand Limited?

With the changes currently being proposed for the Merino industry the future operation and ownership of PAC needs to be considered to ensure that value continues to be captured by both growers and the industry in general. A strategic review of PAC is currently being undertaken to determine how best to accomplish this in terms of the new company.

20. Does a vote against the setting up of a commercial company mean things will stay as they are?

For things to stay as they are would require merino growers to contest the recommendations of the McKinsey report, recommendations which have been overwhelmingly endorsed by both the general wool industry and the merino sector through the formal vote on the McKinsey Report. For the merino sector the status quo would require the maintenance of a 5% levy, given the McKinsey vote and the general business and political move away from compulsion this would not be tenable. A reduction in the levy to 2.75% would however be seen as a positive move away from reliance on a compulsory levy to fund all activities.

The opportunity for the merino sector is therefore to develop a model that captures the benefits of the current model, as well as the benefits a commercial model offers growers. The Merino New Zealand Limited model would do this.

21. Are there any alternative models?

Wrightson is the largest and most experienced broking firm in the industry and the combination of its commercial skills, experience and infrastructure and the marketing expertise of Merino New Zealand would bring significant benefits to the New Zealand merino industry.

While there are alternative models, Merino New Zealand believes that the proposed joint venture with Wrightson would be the best way to deliver enhanced value to the industry.