'Chance for united dairy sector blown away' as merger of First Milk and Milk Link fails

Published on Tuesday 5 February 2008 21:10

THE merger between First Milk and Milk Link, which would have created the biggest farmer-owned dairy company in the UK, has collapsed.

A joint statement issued yesterday said: "Despite extensive discussions, it has not been possible to agree terms for a merger that either party could recommend to their membership at the present time. Both boards believe that strong farmer-owned businesses are vital to the long-term future of the dairy industry."

Richard Greenhalgh, chairman of First Milk, which has about 2,700 members in Scotland, England and Wales, vented his disappointment in a letter to his members. He said: "We got a long way down the road to doing this merger, but in the latter stages there were a number of important issues to resolve – the critical issue being the valuation of the two businesses."

Due diligence is always an integral part of any proposed merger or takeover, and that is where the deal fell through, despite the fact that First Milk commissioned an independent valuation.

Greenhalgh said: "The expert stated that the value of the First Milk business was considerably in excess of Milk Link. This included discounting our valuation premium and presenting a mechanism that not only rewarded capital, but would also put the new operation on a very sound financial footing."

The real issue, apart from personality problems, is that Milk Link could not accept the fact that First Milk's holding in Robert Wiseman Dairies, which was bought in 2004 for 28 million, is now reckoned to be worth at least 60m – and almost certainly substantially more. The fear on the Milk Link board appears to have been that the merger could become a takeover.

Jim McLaren, president of NFU Scotland, who runs a dairy farm near Crieff, said: "I am not interested in hearing who is to blame for the talks collapsing: the fact is that a real chance to create a united, rather than a fragmented dairy sector, has been blown away, certainly in the short term.

"What is more frustrating is that, after a decade, we had finally got the competition authorities to back off.

"They had really taken a progressive approach to the merger and given the industry a chance to create a solid future."

The outcome is likely to be a new level of pressure on farmers, with the supermarkets and other major buyers seizing on the fact that the dairy industry remains dangerously divided. Milk prices have risen substantially in recent months, but there are already whispers in the trade that they may be planning to pay their suppliers less.

Greenhalgh remains the perennial optimist. He said: "In contrast to many commentators, we are positive about the future markets for our members' milk. Milk volumes in the market remain extremely tight and our sales teams continue to highlight farm input cost increases and push for further rises in all sectors in which we operate."