Fonterra food brands sale heats up as Bega and Meiji eye Mainland assets

Interest in Fonterra's Mainland businesses is warming up.

Interest in Fonterra’s Mainland businesses looks to be heating up.

ASX-listed Bega Cheese said this week it had advised the Australian Competition and Consumer Commission (ACCC) that it intended to lodge an application to gain informal merger clearance for Bega’s potential acquisition of Fonterra Oceania.

Today, The Australian newspaper, quoting unnamed sources, said Japanese food group Meiji Holdings – a Nikkei 225 constituent – was understood to be a “dark horse” in the sale of Mainland.

France’s Lactalis has also proposed buying Fonterra’s global consumer business and the ingredient and food service businesses in Australia.

The co-op says it is still pursuing a “dual track” process – for either an outright sale or an initial public offer (IPO) and listing for Mainland.

Fonterra is about 14 months into what it said would be a 12- to 18-month sale process for the assets, estimated to be worth $2-$3 billion.

Bega has made no secret of the fact that it wants Fonterra’s Australian manufacturing assets.

In a statement to the ACCC, it said: “Bega Group believes that if it were to be included in the sale process and was the successful acquirer of Oceania assets, it would significantly enhance outcomes for the company and the dairy industry as a whole, particularly in Australia.

“The combination of the Fonterra and Bega Group assets would lead to greater efficiencies and enhanced outcomes for Australian farmers, customers and consumers,” it said.

Fonterra has a longstanding commercial and distribution agreement with Bega Cheese. Photo / AAP

Bega said it hoped to work constructively with Fonterra on the sale of its Oceania businesses and that it saw itself as the natural acquirer.

However, the two remain locked in a legal wrangle over the products Mainland makes for Bega.

Fonterra had sought a legal ruling on what Bega’s rights were over its brands with respect to the change-of-control clauses.

Last November, Fonterra filed proceedings to seek a determination of its rights regarding its licensing agreement with Bega.

The New South Wales Supreme Court dismissed the proceedings but Fonterra said in May that it would appeal.

Forsyth Barr senior analyst Matt Montgomerie said interest in the assets looked to be increasing.

“Bega have been quite strong in their view for some time that they are coming after the Oceania assets and the announcement last night sort of confirmed that,” Montgomerie said.

“They’re in the midst of an optimisation and growth strategy, and it feels like Fonterra’s Australian assets are ripe for optimisation.

“Fonterra has pushed back and obviously there is the ongoing legal stoush, but they have been relatively strong in their view that they want to sell these businesses as one and not sell them in parts.”

Bega only wants the Australasian or Oceania parts of the business, which is 75% of revenue and 60% of Mainland’s gross profit.

The reason gross profit was lower than revenue was because of the poorly performing ingredients operations out of Australia, Montgomerie said.

He noted the media reports concerning Meiji’s interest.

“It feels like at this point there’s still a few interested parties around in the entire Mainland group, which may be creating a bit of tension."

Fonterra’s Australian division employs about 1500 staff and sources products from about 650 dairy farmers based in Victoria, Tasmania and parts of South Australia and New South Wales.

The retail brands include Mainland, Western Star and Perfect Italiano, and it holds the licence to the Bega brand for natural and processed cheddar cheese products in Australia.

The co-op also supplies milk, cream, cheese and butter products to food distributors through its Anchor Food Professionals brand.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.