“Therefore, our view of Fonterra’s (A-/Stable/A-2) credit quality is not materially changed.”
S&P said Fonterra’s consumer business was more capital-intensive and needed a higher level of operational expenditure and ongoing brand investment compared with the co-operative’s remaining ingredients and foodservice divisions.
“We believe the divestment will help Fonterra reduce operational complexity, moderate capital expenditure requirements, and unlock capital to be redistributed internally to pursue organic growth options,” S&P said.
In addition, the co-operative had the financial capacity to forego sizeable earnings from the divested business (about 16% of group operating profit as highlighted in the first half of fiscal 2025) and deliver a sizeable capital return to shareholders.
S&P noted that around $3.2b of the $3.85b in anticipated sale proceeds was earmarked to be returned to farmer shareholders.
The agency projected Fonterra’s debt-to-earnings before interest, tax, depreciation and amortisation to be about 1.5 times in its 2025 financial year just ended, comfortably below S&P’s “downside trigger” of 4.0 times.
“Notwithstanding this credit ratio headroom, we expect the reduction in business scale to be accompanied with a recalibration of the co-operative’s capital structure, consistent with the ‘A-’ rating,” S&P said.
Forsyth Barr senior analyst Matt Montgomerie said the sale was a “solid outcome” for Fonterra.
“The sale includes ‘long-term agreements for Fonterra to supply milk, ingredients, and other products to the divested business’ — we understand this is 10 years and Lactalis will be one of FSF’s largest customers," he said in a report.
Montgomerie noted there was potential for a further $375m from the inclusion of the Bega licences held by Fonterra Australia, which would take total proceeds to $4.22b.
He added the sale would not change Fonterra dramatically as a business.
“What remains will be a refreshed focus on the better-performing core ingredients and foodservice businesses,” he said.
“We view Fonterra as a better business without the poor-performing Mainland Group.”
The sale remains contingent on obtaining farmer shareholder approval, separation of the businesses and receipt of regulatory approvals.
The co-op aims to complete the transaction during the first half of calendar 2026.
On the NZX, Fonterra’s units last traded at $7.37, up 22c or 3%, while the farmer-owned shares eased 2c to $5.98.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
