In recent years Tnuva, Israel’s largest food company, has undergone broad structural changes as part of its strategy of becoming a company that markets brands rather than commodities. The company’s new organisation and management style place it in a strong position to confront existing and future challenges on local and global markets, argues Aaron Priel.

Many of the owners of Tnuva, a cooperative founded by farmers in 1926, oppose the new strategy initiated by Tnuva chief executive Arik Reichman. He is seeking the issue of new stock, making the food giant a commercial company traded on the stock exchange, and at the same time seeking a strategic partner, preferably a multinational food conglomerate. But groups of farmers from the 620 moshavim and kibbutzim (cooperative settlements) that now own Tnuva are challenging Reichman’s new strategy and calling for his resignation. The current owners of Tnuva – who own and operate large dairy herd farms – supply the raw materials to the company, arguably creating a conflict of interest.

The stock issue plan involve the flotation of 10-15% of the company’s shares on the stock market while a further 20% will be issued in a private placement. In all, a total of 20-35% of the company’s stock will be sold. But before the stock issue goes ahead, Tnuva, being a cooperative, must complete its transformation to a limited company. Reichman was determined to lead the cooperative to privatisation, and for those with a short memory, he made this statement six years ago, yet the company is still a giant cooperative under his control.

‘Strategic investor’ merely a myth?

After three years of headlines about a putative “strategic investor” that was poised to buy some or other large block of shares, it transpired that nobody would touch the cooperative under the terms that Reichman was offering. A year ago, Reichman came out with a strategy change: not a strategic partnership, but a public offering. To his credit, he transformed Tnuva from a colourless, stagnating concern into a dynamic, competitive company, polishing its brand name into something exciting and powerful. But to do that, he poured many millions into advertising and marketing, “without ever having to prove the result in the form of disclosed profits,” as noted in an analysis in Haaretz.

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The dairy herd farmers maintain that floating Tnuva’s shares, as agreed by the general assembly of the cooperative, “will be carried out in an un-equal process and will deprive some of the owners of their rights.” Heading the list of owners are ten moshavim considered large suppliers of milk to Tnuva. But other farmers in the same moshavim who supplied Tnuva with fruits, vegetables, poultry and other non-dairy products claim that the distribution of Tnuva future shares will give preference to the cattle breeders. The controversy goes on and frustrates Tnuva’s management plans to privatise the cooperative, not to mention the apprehension of any multinational food conglomerate to become a strategic partner with Israel’s largest food concern.

Tnuva valued at ILS4bn

Tnuva has no price tag yet. Its value will be determined through the share flotation and the private placement. After the stock issue, whenever it happens, Tnuva’s shares will be negotiable and the cooperative societies that hold shares will be able to trade them, with certain restrictions to keep control of the company with the agricultural producers. In 2004, Tnuva registered net profits of ILS160m (US$36.36m) on sales of ILS5.5bn. Tnuva’s debts to the banks, according to some sources, amount to approximately ILS1.5bn. Although Tnuva has not yet been valuated, sources in the food industry assess its value at ILS4bn.

In the course of its restructure, Tnuva has abandoned unprofitable activities and invested in new endeavours including acquisitions of companies with synergetic activities to the core business, which now support and strengthen Tnuva’s core business. At the same time, Tnuva is focusing on enhanced processing, marketing and distribution of foodstuffs – especially fresh produce – at all stages of the marketing process. Despite the ongoing controversy with some of the owners, Tnuva keeps on seeking strategic partnership and joint ventures worldwide in order to advance its policy of globalisation.

International partnerships

It signed a joint venture with New Zealand’s Fonterra, to produce value-added products derived from whey and milk, setting up the first whey protein plant in the Middle East. In 2004, it established Tnuva USA, aimed at developing Tnuva’s brand name in North America. A year ago, Tnuva invested US$100m to set up a comprehensive dairy/industrial enterprise in Romania in cooperation with the European Bank for Development and Reconstruction. This new venture will include state-of-the-art cow sheds and feed centres, and dairy herd processing facilities, as well as distribution infrastructure that will market its products throughout Romania under two brands: one is Tnuva’s whole range of fresh products, and the other brand is Yoplait, offering – with the cooperation of Yoplait France – consumers in Romania the whole range of Yoplait branded yogurts.

The remaining issue is: will Reichman be able to carry out his plan to make Tnuva a commercial enterprise, traded on the stock exchange, thus leaving the door open for an international partner to become a strategic partner. In a recent interview in the press, 67-year old Reichman, considered one of the country’s outstanding and successful business executives, said that “now is the time to fight back and crush the opposition. I was quiet for a long time, and this was my mistake.”

+ + ADDENDUM + +

The Tnuva Board of Directors this week approved the structural reform plan which will retain the controlling interest in Israel’s largest food company with the kibbutzim and moshavim movements, who presently own 100% of its shares. Tnuva CEO Arik Reichman said that the shares will be issued on the Tel Aviv Stock exchange, and a strategic partner will be brought in, “all as planned.” However, the management agreed to open a debate with shareholders who have reservations about the plan, and September 2006 was set as a new date for the cooperative’s council to meet. A report in The Marker notes that in view of that, there is no chance that Tnuva shares will be offered on the Tel Aviv Stock Exchange “anytime before 2007.”

According to the new plan, 10% of Tnuva shares will be floated, which will set a price for shareholders to exit the cooperative, if they wish. The current shareholders, according to Tnuva, namely the kibbutzim and moshavim, will retain control of the company. The management also accepted the demand of the shareholders to set up a steering committee that will oversee the execution of the resolutions made at the Tnuva council of 2003, which called to bring in a strategic investor and give shareholders a mechanism to exit.