Owen Hembry: Vatican's blessing good for Fonterra

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With the blessing of the Vatican, Fonterra has agreed to buy out its major partner in Chilean company Soprole.

The deal with charitable foundation Fundacion Isabel Aninat, which is run under canonical law, needed Vatican approval and gives Fonterra 99.4 per cent of the company and the freedom to make decisions alone and act quickly.

The outcome will be an increasing amount of Fonterra exports coming out of South America.

Discussions on a buyout have taken place on and off during recent years. Until a few years ago Fonterra was essentially a passive investor.

Chief executive Andrew Ferrier says: "I think the long and the short of it is that they decided it was no longer core to them."

The deal also gives Fonterra an 86.2 per cent stake in Soprole's manufacturing subsidiary Prolesur, with which it has an export agreement to sell products through the Fonterra network.

Ferrier says there has been a lot of talk about rolling Soprole into Dairy Partners Americas - Fonterra's South American joint venture with Nestle.

"Both parties [Fonterra and Nestle] have said it could be sensible but it's got to work in the Chilean context, and we don't know whether it'll work in the Chilean context," Ferrier said.

"I think it's one thing at a time, too. We're concentrating on just getting a bigger stake in a really great performing business."

Fundacion Isabel Aninat had been resistant to any idea of folding Soprole into Dairy Partners Americas and it is not totally out of the picture, retaining a 13.6 per cent shareholding in Prolesur.

Under Chilean law, Fonterra cannot force remaining shareholders to sell up.

FONTERRA GROWTH

Ensuring future funds for growth was one of the main reasons behind a capital restructure programme launched by Fonterra in November.

Fonterra's strategy is a global one, as customers are reluctant to buy from only one origin because of risks to delivery.

Despite the US$201.9 million ($258.55 million) bill for buying up Soprole, Fonterra can still raise funds and move on other opportunities - which could include Australian co-operative Dairy Farmers - but at some point it will need access to capital to continue growing.

The Australian Financial Review says Fonterra is among the leading pack looking to buy Dairy Farmers, along with National Foods and Parmalat, while Canadian operator Saputo is also thought to be among those undertaking due diligence.

Fonterra Shareholders' Council chairman Blue Read says farmers generally support the growth strategy and that the debate about capital structure is a separate issue to that of overseas expansion.

The restructure process stumbled after it became clear farmers were not going to back a first vote on the Fonterra board's preferred option, which would have included the listing of an asset holding company - an option now officially parked.

Fonterra has had to go back to the drawing board and re-examine all previous options and any new possibilities.

"We're still doing a lot of work ... It's just humming along below the surface right now," says Ferrier.

KIWIFRUIT MEGA MERGER

The proposed meat industry mega-merger has imploded, but it may soon be the turn of the kiwifruit sector to have a go.

Andrew Fenton, chairman of listed kiwifruit company Satara Co-operative Group, said at last week's annual meeting that when ready the major post-harvest companies should put aside their pride and prejudice and join together in one large company "who, with growers, take ownership of Zespri and truly control the supply chain from orchard to market".

Zespri is owned and controlled by growers and, apart from the Australian market, holds the sole rights to exporting kiwifruit.

Fenton was careful to say it was a personal opinion and not that of Satara, but as chairman of one the biggest companies in the industry his view will be given considerable weight.

"We're a little bit disparate in the fact that the growers are mostly separated from a lot of the post-harvest facilities, and the post-harvest facilities are separated from Zespri," Fenton says. "I think that there will become a time when industry rationalisation will step up a gear."

Between six and eight major post-harvest companies supply about 70 per cent of class one fruit to Zespri.

Fenton's idea would combine growers, post-harvest companies and Zespri under one umbrella.

However, industry rationalisation would not mean the end of Zespri, which Fenton says is among the five biggest fruit labels in the world and has done very well for growers.

"Quite the opposite in fact," he says.

"My idea is that it would actually support the continuance of Zespri as the predominant marketer of New Zealand kiwifruit in the world."

Fenton would like Zespri to be able to focus more on looking outwards towards the markets.

"The main thing is to be able to focus Zespri clearly on the market and the outcome, and maximising the money back home for growers from the market - rather than turning on-shore and having to sort out all sorts of competitive issues of compliance and that sort of thing, where Zespri has to play mother to the industry at the moment."

Fenton is just testing the water at this stage, but with the industry under financial pressure the climate could be right during the next two or three years for such a change to happen.

Zespri chairman Craig Greenlees says it is always striving to achieve better integration among grower, post-harvest and Zespri.

Industry integration has been informally talked about from time to time, Greenlees says.

"There's no question that your one mega-company involving all post-harvest and Zespri would help improve integration. Whether it would give growers better service and accountability for their post-harvest services would be a moot point on the other side," he says. "I think that's the challenge; no proposal is all good."

STARTING WITH A BANG

Zespri chief executive Tony Nowell says the kiwifruit exporter expects a strong start to the new selling season with aggressive sales plans to manage an earlier arrival of fruit.

Kiwifruit has arrived in Japan in time for a national holiday and is expected to reach Europe during the next two weeks.

Market conditions are encouraging with less of an overhang of Italian fruit because of a poor supply season in that country, Nowell says.

Indicative returns for the new season will be published in May, and a full season forecast in August.

Zespri will also provide a full season wrap-up for the year finished March 31 next month.

The forecast given in February was for total fruit and service payments of $649.8 million, up from $633.9 million the previous season.

However, the green fruit forecast was for $6.29 a tray, down from $7.41 the previous season, and the gold fruit forecast was $8.79 a tray, down from $9.42 the previous season.

Satara chairman Andrew Fenton says most orchards will show a considerable loss for the financial year.

"The financial difficulties in the kiwifruit export business will continue, and every effort needs to be made by Satara, growers and Zespri to minimise the impact of rising costs and to maximise efficiency and performance at every step of the process to ensure that the industry is sustainable, viable and profitable," he says.

NOBILO'S NEW LOOK

Nobilo Wine Group last week changed its name to Constellation New Zealand in line with its New York-listed parent, Constellation Brands.

However, famous Kiwi brands, including Nobilo and Monkey Bay, will stay put and are in for a boost.

Chief executive Joe Stanton says the corporate renaming is part of an evolution from an historically sales-driven to a more brand-focused approach to the market.

"If we're going to succeed as an industry globally over the longer term and drive all of our growth through those international markets, we need to make sure that our brands are clearly positioned in the premium segment of the market and continue to reinforce that point," Stanton says.

New Zealand wine exports for the year ended February were up 18.5 per cent, at $767.3 million, with the industry targeting $1 billion by 2010.

A brand-focused approach entailed greater emphasis on marketing and building consumer awareness both of individual company brands and also that of New Zealand.

"I think it's critical to our long-term success; there's no doubt about that."

- NZ Herald

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