Wool Partners Co-operative (WPC) chairman Jeff Grant said last week that while it needed half the strong wool production to proceed, the associated $65 million in capital raised would give it the cash and market presence to start considering rationalisation.
"You can't talk to someone without cash in your back pocket," he told farmers in Balclutha.
Mr Grant said a goal was to ensure WPC was not short of capital. Its prospectus forecasts WPC to be cashflow positive in the period up to October 19, 2011.
WPC wants to eventually grow its share of the strong wool market to 60%, which it proposes to market through an integrated supply chain using auction, contracts and pools.
For farmers, the decision to invest in WPC or not was as much a philosophical one as an economic one, he said.
"If growers are dissatisfied with the model, they have an opportunity to change it. There seems to be a clear understanding of that principle."
Under the proposal, WPC would buy certain assets from Wool Partners International (WPI), which is jointly owned by Wool Grower Holdings and PGG Wrightson.
That includes wool exporter Bloch and Behrens ($1.965 million), Wools of New Zealand ($1.237 million) and $15.2 million for the assets, including goodwill, and liabilities of WPI and its subsidiary NZ Woolhandlers, relating to the supply, marketing and corporate activities.
Mr Grant said it was a low asset business but of the $15 million for WPI, $13 million was for goodwill and just $500,000 - the cost price - was for brands, which he said were still building their value.
For $17.7 million, Mr Grant said WPC would be forming a company capable of handling $300 million in wool.
PGG Wrightson would retain storage, logistics and woolhandling facilities which will be contracted to WPC, but WPC has an option up to 2013 to buy those assets for $250,000.
PGG Wrightson could not re-enter the wool market in competition to WPC and nor could WPC re-enter the logistics business in competition with PGG Wrightson.
A spokesman for PGG Wrightson said the rural servicing company was not quitting what some saw as a loss-making wool business.
He said it was profitable and the company saw more chance of structural change in the industry and activities to lift the value of wool by moving the business outside the PGG Wrightson umbrella.
The approach to acquire PGG Wrightson's wool business came from within the wool industry and the rural servicing company had supported steps to create firstly WPI and now WPC, he said.
Mr Grant said farmers would notice changes in the way wool was sold, with auction still a major outlet, but with a shift to greater use of contracts and the introduction of pools.
The price of wool would be lifted by investing in marketing to grow demand, something he said had not happened in 15 years, and by adding value to the product through brands backed by product integrity, providing evidence it was an ethical and sustainable product and from farms that met animal welfare standards.
Users would make royalty payments for using WPC's brands such as Laneve, which could be worth 50c-$2 a kg. Half of that would be paid to farmers and the balance for market development, he said.
As cashflow grew, it would replace the 2% market development fee WPI initiated this year.
Mr Grant said a fundamental change in the way New Zealand sold wool and supported the market was needed because carpet retailers were concerned at the lack of market support they received.
WPI had done that by providing educational tools for retailers which would continue under WPC.
WHAT IS PROPOSED
• Growers to invest $1 in Wool Partners Co-op (WPC) for every kg of wool produced.
• $1 to be paid in five 20c annual instalments.
• Payment of final three instalments could be delayed depending on company success.
• Growers will commit all their wool to WPC.
• $17.7 million will be used to buy assets and create an integrated supply chain.
• Requires commitment of 50% of strong wool clip to proceed.
• Closing date for shares November 30.
• WPC will acquire the assets on December 31, 2010.