When does a successful company become a monopoly? What rights do governments have to restructure cooperatives to ensure free competition? Israeli dairy giant Tnuva’s attempt to collaborate with Nestlé is being hampered by the government’s determination to carve up its operating divisions. Aaron Priel brings us up to date on a battle heading at full speed for the courts.
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Tnuva Marketing Cooperative is Israel’s largest marketing and trading company. Over the past four years it has been undergoing major changes in its organisational structure and management style, which have resulted in the company’s present stability and profitability. Tnuva’s sales reached nearly US$1.5bn in 2002.
Tnuva is owned by farm collectives and cooperative settlements throughout the country, but is managed as a market-driven enterprise and applies a policy of strategic partnerships, notably its association with Yoplait. The most recent development is the resumption of negotiations with Nestlé to establish a strategic partnership, and the Israeli firm’s intention to acquire dairies in neighbouring countries and in East Europe.
Though its current organisational structure is based on four separate divisions – milk and dairy, meat, fruit and vegetables, and poultry – with each division enjoying autonomous management status, this powerful business entity is now fighting to prevent the government from taking over the company and splitting it up, on the grounds, according to the Ministry of Finance, that “Tnuva is a monopoly,” in line with the Ministry’s plan to reduce the power of monopolies.
Allegations of market monopoly
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By GlobalDataThe Finance Ministry demands that Tnuva’s divisions be separated, and the first stage aims to separate the business and accounting functions of Tnuva’s powdered milk plant, without separate incorporation. The plant, which is the only one in Israel, except for insignificant imports, controls the market for powdered milk, used by Israeli dairy and ice cream industries. Tnuva, according to the Ministry, “uses its control to exert a decisive influence on market prices. But the powdered milk plant is just one aspect of the allegation that Tnuva exploits its dominant market position in the country’s dairy, fresh produce and poultry food sectors.
Tnuva accused the Ministry of Finance of attempting to bypass the Restrictive Trade Practices Tribunal (RTPT), and illegally intervene in the affairs of a commercial company, maintaining that the RTPT “is the sole authority for dealing with monopolies. Tnuva is a private company, it does not belong to the state, and the Minister of Finance shouldn’t manage it,” reported Globes.
Tnuva fighting back
The High Court of Justice enjoined the Ministry of Finance from instituting changes in the dairy industry – relating specifically to the Minister of Agriculture’s decision to dismantle the Milk Production Board, a statutory entity, before a hearing is conducted in the presence of the parties. Tnuva considers this decision a temporary, albeit indirect, victory.
Arik Reichman, Tnuva president and CEO, commented that although he does not foresee the possibility that the company will be split up, “We at Tnuva are not blowing off this trend and attempt and are preparing ourselves accordingly. If the matter turns practical, those who lead the move should expect surprises,” as he was quoted in Haaretz. He added that if the government decides to cause any harm to Tnuva, the company has a long line of steps to prevent the move. “Clearly we are at war with the Ministry of Agriculture and the Minister of Agriculture. It is clear that Agriculture Minister Yisrael Katz wants to take control of Tnuva by means of a deal he has struck with the Finance Ministry and by exploiting the Economic Arrangements Law.”
In its 2004 budget plan presented to the Cabinet mid-September, the Finance Ministry proposes to split up Tnuva into separate corporations in accordance with their fields of business, so as to prevent the company from flexing its muscles and dictating the price of milk to producers, i.e., the dairy farmers.
Tnuva denies this claim, noting that in fact the government decides on the price of milk, adding that each dairy purchases the quantity it requires. The Finance Ministry defines Tnuva as a monopoly, since it has control of more than 50% of the market for purchasing milk from producers, the marketing of liquid milk and the production of milk powders.
Government reining in Tnuva’s international strategy
Tnuva’s CEO maintains that the Finance Ministry’s decision to split up Tnuva, terming it “a move initiated by amateurs,” is adversely affecting Tnuva’s attempts to establish strategic partnerships with multinational companies. According to press reports, Nestlé International has recently resumed its negotiations with Tnuva to form a strategic partnership, “when Tnuva changes its structure from an agricultural cooperative to a full fledged business entity.”
Nestlé is already active in Israel, owning 51% of Osem, albeit only in the coffee, candy and confectionery segments of the company. Osem, as reported, considers Nestlé’s partnership with Tnuva in the milk sector as a similar move to the merger of Strauss and Elite. Strauss has a strategic partnership with Danone, the world’s second largest producer of milk products, and now Tnuva aims to create a partnership with Nestlé, the world’s largest producer of milk products.
As the situation stands at present, Tnuva’s reaction to the government’s decision to split Israel’s largest food marketing organisation can be summed up in Reichman’s statement: “We’ll see you in court.”
