Thursday, 29 March 2018

Slow Learners?

We dined last night with a couple of Fonterra directors, a few senior staff and a bunch of fellow farmers at the Brightwater Motor Inn. I didn't learn much, but neither it seems have they.

After the standard review of the half-year results, there was plenty of time for questions. They focused on the Beingmate debacle and Leonie Guiney.

Beingmate
I got the ball rolling with a couple of questions. The slide pack showed the Beingmate share price and indicated that the write-down bought the book value into line with the share price. But if the share price is any guide, then significant write downs should have occurred ages ago - so why didn't that happen? [answer: KPMG mumblefuck Discounted Cash Flow] Also, isn't this a closely held stock with very low liquidity? [um, yes]

Others piled in. Surely there must have been a problem with the due diligence? [hell no, there was over 400 pages of it] After the Sanlu bungle, Sir Henry promised we'd never take a minority stake in China again, why did you? [even a majority in China is no safeguard] Have you set a time-bound decision path for exit? [something about patience, & that Theo will obviously be highly motivated to push this along before he leaves]

I was listening closely for some comment about what Fonterra had learned from this obvious cock-up. On the second go with the mike I noted that according to the board, this wasn't Theo's fault and the due diligence was top-notch. So was it just bad luck, or did we learn something?

The board's answer was to blame execution, i.e. management, but we never got even a vague hint at what we might do better next time.

And please, this was definitely a board error. China has what Bloomberg called a dairy duopoly. They have 44% of the market between them. The next largest has 4.8% and Beingmate is not even mentioned. So when you hear a Fonterra director saying it's a top brand, they mean for infant formula only.

Consider the following timeline, bearing in mind that Fonterra was created by Parliament as a national champion, as requested by the dairy industry leaders of the day.

2001: Parliament passed legislation (DIRA) to allow an almost complete merger of all dairy processors in New Zealand, for various reasons, creating a contestable monopsony that was gung-ho about cost savings and upside potential. 
April 2008: China signs first free-trade deal with a developed country, NZ, which you'd think would give us inside running with China's dairy industry, right?
September 2011: Theo Speirings begins CEO role at Fonterra. Knows all the stuff about international markets and that.  
January 2012: Nestle tips $400m into a JV producing milk in Northeast China. 
May 2013, Danone buys 4% of one of the Chinese duopolists. 
March 2015, Fonterra buys 18.8% of Beingmate for $752m, "paying a high price to raise its presence in China’s branded infant formula market...given that many multinationals are investing heavily and demand expectations are easing".
For reasons unknown, despite being all internationally-savvy & despite having persuaded  the pollies to give them local market power, and even with the first ever FTA edge, Fonterra took the ultra-slow boat to China. Nestle and Danone and others were way ahead: we got goosed because no-one was alive to the game.

Not Theo, not the board, no-one. bugger. We could've been Danone in 2013, paying 325m euros for 4% of a duopolist. I bet we wouldn't be writing that down now. 

Leonie Guiney
Right at the death, using the last question of the night, some wonderful man pointed to the hiterto invisible elephant in the room: Leonie Guiney, suggesting that if Fonterra is going to so much trouble to gag her, there must be a pretty serious problem. 

The responding director was happy to dwell on how crucial confidentiality is to the efficient running of the co-op, then rashly inquired if this sorted the concerns? Not for me, I said: Guiney was voted in by farmers, the board didn't like her, the board persuaded us to change the director appointment process, through which Guiney was knifed.

In response, we were all detained by a long description of how tough the new process is, and why that toughness is so great.

Final Thoughts
The cult of managerialism hasn't worked out well in this case. Theo and his board were all asleep at the wheel for a few years, so they can't blame him. But they don't want to take the blame themselves. So he's leaving and they're staying.

Not just staying, but exerting more control. Being the right people for the job, the board sees its job as including the expulsion of others, like Leonie Guiney, who don't fit a particular mould.

As a shareholder, I'm pretty grumpy about this whole thing. I think the board is captured by its advisors: management, partners, lawyers & merchant bankers.

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