Billion-dollar dairy asset swap

Dairy giants Fonterra and NZ Dairy Foods have disclosed plans for a billion-dollar asset swap that will bring the Anchor brand in New Zealand back into the Fonterra family.

Most of New Zealand Dairy Foods' (NZDF) prime assets are being bought by Fonterra, with NZDF, in turn, buying the Meadow Fresh milk brand and Kiwi Meats business.

Some 2300 workers will switch from one employer to the other, having been promised work on the same terms and conditions.

Fonterra is paying for its part of the deal with $338 million raised in new bank debt.

One of the triggers for the deal was the announcement by Graeme Hart's Rank Group in April that it was sounding out potential buyers for NZDF, the nation's second largest dairy company after Fonterra and worth an estimated $1 billion.

Hart had already considered a plan to split the Anchor fresh milk business from its dairy foods business, which also makes the Fresh 'n Fruity yoghurt brand.

A Fonterra spokesman said the sale had presented an opportunity "to ensure that what is an iconic New Zealand brand - Anchor - remains in the country, in New Zealand ownership".

Dairy Foods being put up for sale had been a major influence on the timing, he said.

The focus behind the swap is a belief that Fonterra should concentrate on what it describes as its "power brands" - namely putting more resources into promoting and marketing fewer brands.

Fresh 'n Fruity, one of NZDF's premier products, is sold only in New Zealand, but Fonterra thinks it can be successful internationally.

Announcing the deal yesterday, Fonterra chief executive Andrew Ferrier described it as a "once only opportunity to regain the brand in our home market".

In the same joint statement, NZDF said it "recognised the logic of Fonterra's strategy in wanting to align its domestic brands with its international profile".

It accepted that it was acquiring a business with a lower profit base but considered Meadow Fresh and Kiwi Meats were well-run operations and well positioned in the market.

Fonterra Brands managing director Sanjay Khosla said buying the brands was part of the strategy to be the number one or two player in all the categories it competed in.

"With Fresh 'n Fruity we acquire a yoghurt business which is significantly larger that our existing yoghurt businesses. We also retain our Mainland cheese brand and pick up the Anchor milk brand in New Zealand," he said.

Khosla joined Fonterra last year and embarked on a mission to prune its portfolio of different brands into the few key "power brands" that return most of the revenue. Part of the co-operative formerly named NZ Milk, now Fonterra Brands, owns about 100 brands, covering yoghurt, dairy spreads and milk drinks.

Frank Brenmuhl, chairman of Dairy Farmers of New Zealand, the dairy arm of Federated Farmers, said members were relatively unconcerned about the deal.

"From Fonterra's point of view it is more of a rationalisation in terms of where they've come from and where they are now," he said. "Both players obviously believe it's a good thing or they wouldn't have agreed to the deal."

Now it was just up to the Commerce Commission to make sure the arrangement met competition regulations. Brenmuhl said it was accepted that it cost quite a lot of money to keep a wide range of brands, so some kind of rationalisation was always a potential. Fonterra's ownership of the Anchor brand overseas but not in its home market "always needed addressing at some stage".

The potential for a full sale of NZDF was not something that would cause undue worry for farmers.

Anchor's local milk business was one of the businesses sold off by Fonterra's predecessors - the New Zealand Dairy Group, Kiwi Co-operative Dairies and the New Zealand Dairy Board - in order to merge.