Fonterra hits back after Winston Peters questions $4.2b Mainland sale plan

Fonterra CEO Miles Hurrell (right) and board chair Peter McBride at the company's Mainland sale announcement. Photo / Jason Dorday

Fonterra has responded to New Zealand First leader Winston Peters’ attack on the co-op’s planned sale of its Mainland consumer business to France’s Lactalis, saying it was up to its farmer shareholders to decide on the $4.2 billion transaction.

Peters questioned how long Fonterra would remain a supplier of milk to Lactalis after the sale and asked if chief executive Miles Hurrell and other executives would get a success fee if it goes ahead.

“Is Fonterra’s ‘long-term agreement’ for three, four or 10 years? Whatever the number, the clock will stop and New Zealand’s milk will become just another in a long line of milk jugs. What stops Lactalis from diluting ‘New Zealand’ products with vegetable fat and lower-quality milk?”

Peters also said Fonterra was “giving away” a brand that had direct relationships with customers.

“Anchor is a flagship brand, with a legacy built by generations since 1886 and more than 130 years of marketing New Zealand milk to the world, developing the products, building customer and consumer trust,” Peters said.

In an emailed response to the Herald, Fonterra said it had been engaging with farmers on the strategic rationale for the divestment for the past 16 months.

The terms of the divestment proposal had been discussed in detail with farmers over the past few weeks through extensive farmer engagement activity.

The terms of the supply agreements with Lactalis had also been publicly disclosed and shared with farmers.

Among them was a raw-milk supply agreement with an initial term of 10 years, which automatically renews until terminated, with a 36-month notice period.

There is also a global supply agreement (ingredients and other products) – with an initial term of three years, after which it automatically renews until terminated, also with a 36-month notice period.

“We can also confirm there is no bonus payment for management team members tied to the completion of the transaction or outcome of the shareholder vote,” the co-op said.

The executive remuneration framework is disclosed in the annual report each year.

“The board’s decision to pursue this divestment is grounded in an understanding of how Fonterra earns farmers’ returns on their milk and the capital they have invested in their farms and the co-op,” Fonterra said.

“By far we do this best through our global Ingredients and Foodservice businesses, which have consistently utilised the majority of farmers’ milk and generated the majority of the co-op’s returns through both the farmgate milk price and dividends.”

Fonterra’s Consumer business has utilised only about 7% of Fonterra’s New Zealand milk solids sold and has a four-year average return on capital of 3.0%.

This compares to an average Ingredients return on capital of 11.5% and average Foodservice return on capital of 13.4%.

Under the terms of the agreement with Lactalis, Fonterra will continue to supply raw milk, dairy ingredients and products to the divested businesses.

This means it will still be Fonterra farmers’ milk in brands such as Anchor.

Fonterra said Lactalis will become one of Fonterra’s most significant Ingredients customers who the co-op will work closely with through a long-term strategic partnership.

Lactalis had outlined its attraction to the Mainland Group business and long-term partnership with Fonterra in the notice of meeting.

“Through focused execution of our strategy, we are targeting an average return on capital of 10-12%, alongside the highest sustainable Farmgate Milk Price, if the Mainland Group business is divested.”

Fonterra has plans to invest up to $1b over the next three to four years in projects to generate further value through its Ingredients and Foodservice businesses, it said.

“Ultimately, the decision to divest the Mainland Group business to Lactalis sits with Fonterra’s farmer owners,” the co-op said.

The $4.22b sale will be put to shareholders at a special meeting on October 30.

It’s not the first time Peters has criticised Fonterra. In 2019, he also expressed disappointment over the sale of Tip Top.

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

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