Ocean Partners Promotes Competition with Oceania Dairy

Oceania Dairy - Ocean Partners

Dairy farmers are joining up to one of the South Island's latest start-­up milk powder production businesses.

Oceania Dairy Group plans to build a milk ­processing plant near Glenavy in South Canterbury on the north bank of the Waitaki River.

It has secured over half the required milk supply to meet its targeted threshold with farmers in the area showing "good keen interest to date", Oceania acting chief executive Paul Park says.

The $100 million dairy plant is on track to meet its capital raising target and planned 2011 plant commissioning. With the $74 million capital ­raising project effectively complete, Park is confident the capital target will be achieved.

And that is without any involvement with the Hong Kong­ listed Natural Dairy New Zealand headed by May Wang.

"We do not have any involvement with the Chinese (Natural Dairy)," Park confirmed.

Oceania Dairy will incorporate a new style of ownership as it builds its company around a model that farmers find attractive for direct investment in the plant and the farms with a strategy to vertically integrate and own both farms and processing.

Oceania opened its capital­ raising in December with the offer of 23 million shares for subscription, representing 88.46% of the company. Ten million of the new shares were available to financial investors at $3.25/share during the offer period with 13 million shares available to Waimate district farmers at either $3.25 during the offer period or $4.25 through a deferred payment arrangement.

The offer period was initially to close on March 15 then was extended into April. As this story went to print the offer had closed off but Park was unable to give details on how much had been raised and from whom.

The objective in the capital raising is to maximise earnings for investors and provide farmers with an opportunity to participate in the entire value chain from the grass to the sale of milk powders in international markets. The minimum investment is 160,000 shares representing $520,000. Allotments to financial investors would be made on a first ­come, first­ served basis with farmer investor allotments based on the length of the supply agreement entered into with Oceania Dairy.

Over and above the $74 million capital raising a further $25 million will be required for plant construction with the total project cost around $100 million.

Initially launched as the NZ Milk Company (NZM), Oceania Dairy changed its name after bowing to pressure from dairy giant Fonterra that opposed the NZM name. The new name reflects the countries of NZ and Australia to the export markets of Asia.

Oceania Dairy Group is headed by former Meridian chief Keith Turner with former Reserve Bank governor and National Party leader Don Brash a director with the four strong director line ­up also including Park of Christchurch ­based merchant bank Ocean Partners and Tim Howe, also of Ocean Partners. Ocean Partners has been the force behind facilitating the $100 million milk powder plant.

The Oceania business model is likened to a replicate of Fonterra's failed restructuring bid. The model plans to include a holding entity for the farms and a holding entity for the plant and ultimately floating a holding company that farmers can have a share in.

In effect the milk powder processing facility would be largely owned by farmers with the new company also looking to acquire farms that would become suppliers to Oceania Dairy.

Listing on the NZ Stock Exchange was an option likely to be explored down the track but right now the focus is on putting the business into an ultimate structure that will put value back to the shareholders.

The Waimate district was chosen because of a high concentration of dairy farmers and a large number of dairy conversions. The milk prices offered to farmers would be "competitive". The company expects a good portion of new suppliers coming on board but also to attract some parties to sign up through preference of choice. The aim is to concentrate supply within close proximity of the plant.

Ocean Partners had been looking for 18 months to realise the opportunity the investment company had identified to offer alternative solutions for milk producers. Several options were explored in the North Island with Southland also considered.

"But for us the heartland of dairy is in the South Canterbury and North Otago regions for what we want to achieve ­ water, land and production opportunity, it's all there.

"The project is not about taking on the giants or taking supply from anyone else. It is about people having the choice to take control of their business. We will concentrate on a small area and do it well from start to finish."

Much confidence for the new venture initially came from the United States Department of Agriculture's forecast (2009) of 1.5%­2.5% annual growth in supply on top of a 2.5%­3.5% increase in demand for dairy product.

"We see opportunity coming through for NZ to capitalise as the ultimate producer of whole­milk product. The world is looking for it and NZ can provide it."

Construction of the plant is scheduled to begin mid­2010 with the plant commissioning in August, 2011.

This is well on track with the company last month granted resource consent for the proposed milk plant, a milestone that came at a critical time as the company finalised its capital and intensified its drive to secure milk supply. The consents were approved for a 35­year period by the Canterbury Regional Council and the Waimate District Council.

While options for size and capacity of the plant were still being evaluated, indication leans towards the plant boasting an eight­ tonne dryer capable of manufacturing 32,000 tonnes of commodity product annually using 18 million kilograms milk solids.

The company acknowledges it is a big decision for farmers to put their livelihood in the hands of a new company.

"We are taking that responsibility very seriously and spending time with farmers as we work to ensure we can deliver on our promises to farmers."