Australia’s green pastures still beckon dairy giant

Fonterra is still determined to be a major player in Australia despite giving up on National Foods.

Chairman Henry van der Heyden said yesterday: "We anticipate further consolidation in Australia and we will be part of that."

However, neither he nor chief executive Andrew Ferrier was prepared to name potential new targets.

Ferrier said: "There are always irons in the fire. We have other opportunities for organic growth and potential acquisitions in our ingredients and brands businesses. We're regularly approached by Australian industry members."

But the list of candidates for Fonterra to buy, or partner, is short.

After National Foods, there are just two big companies in the consumer dairy sector of interest: Dairy Farmers and Parmalat Australia.

Fonterra already has good cheese and ice-cream brands in Australia - these could be turned into sizeable entities with more investment and attention.

But Fonterra's reason for chasing National Foods was its lack of strong brands in the high-volume fresh milk and the high-margin yoghurt and flavoured milk markets. Parmalat and Dairy Farmers could give Fonterra that coverage.

Even better would be a merger of the two in which Fonterra held a sizeable stake.

For several years, analysts have been picking that the sector will consolidate into two major players. San Miguel's ownership of National Foods will not change that equation.

New South Wales-based Dairy Farmers is a farmer owned co-operative with a sizeable consumer products division. It is reviewing its structure and has talked of listing its consumer business on the Australian Stock Exchange. The listed entity would probably remain majority owned by farmer shareholders, but this still gives Fonterra the opportunity to buy a sizeable cornerstone stake.

If Fonterra could do a deal with Dairy Farmers, it might be able to create a joint-venture partnership to give National Foods a run for its money.

Fonterra already has a good record with joint ventures, having merged its consumer businesses in South America with Nestle to form Dairy Partners of America.

Parmalat Australia is a subsidiary of the Italian dairy giant bankrupted in 2003 after a multi-billion-dollar fraud.

Parmalat Australia was one of the multinational's best-performing subsidiaries but there is a real possibility the struggling parent company would sell it for the right price.

The other two big dairy companies across the Tasman are Bonlac - in which Fonterra already has a 50 per cent stake - and Murray Goulburn. They are focused on exporting dairy ingredients.

But Victorian farmer co-operative Murray Goulburn does have a growing domestic presence in consumer products such as dairy spreads and flavoured milk.

It may offer Fonterra another partnership option.

Fonterra management is aware that the company must be a market leader in Australasia if it is to succeed in its long-term strategic goal of being a dominant player in the wider Asian region.

Ferrier said Fonterra still had a significant business in Australia without National Foods.

"Our businesses in Australia, which include leading brands such as Mainland and Bega cheeses, Brownes milk and yoghurts, and Connoisseur and Cadbury ice-creams, generate combined revenues of $1.4 billion."

That's a good start, but Ferrier knows organic growth alone will not be enough. With an extra A$250 million to spend, he is unlikely to wait long before he goes shopping again.