Fonterra readies for battle

By LIAM DANN


It should have been a normal day at the office, but on October 8 Fonterra's easygoing Canadian chief executive, Andrew Ferrier, opened an email that left his long-term plans for Australian expansion in tatters.

National Foods, Australia's largest listed dairy company, was planning to buy tinned fruit business SPC Ardmona, something Fonterra and its dairy farmer shareholders could not tolerate.

"I knew we were going to have to consider the implications and I thought: well, we might have to do something," he recalls in typically understated fashion.

Just weeks earlier, Ferrier was rebuffing criticism for Fonterra not taking over National Foods itself. Despite holding a cornerstone stake of 17 per cent, Ferrier argued National Foods was too expensive. Everything changed with that email.

"We've always been concerned about how expensive it was, but, faced with the SPC merger, we realised it would only be more expensive and difficult if we tried to buy it further down the road." he said from Melbourne yesterday. "We had to move."

By October 11, as the SPC news leaked into the press, Ferrier and chairman Henry van der Heyden were already considering the possibility of a takeover.

Fonterra was always ready to roll, Ferrier said. "National Foods had been on the agenda for some time and the board had already done the homework."

In fact, board support for the takeover was in the bag by the time Ferrier rang National Foods boss Peter Margin on October 22 to tell him he wasn't happy about the SPC move.

The Australian Financial Review reports that the call left Margin perplexed. It was a civil conversation but one that made it clear there was conflict over strategy, the paper wrote.

"I told him that we didn't think it was in National's best interests to head down the SPC route. That they should stick to their knitting," Ferrier said.

Margin made it clear that National Foods was not about to change its plans unless Fonterra put up an alternative proposal in writing.

"So we came out with something in writing," Ferrier said.

Ferrier flew to Australia and began the first stage of what looks set to be a vicious battle to convince National Foods shareholders to either stick with Margin's plan to merge with SPC or, as Fonterra puts it, take the cash.

On his whirlwind tour of Australian fund managers, equity analysts and media representatives, Ferrier is upbeat.

This is not the Fonterra of milk drying factories and commodity cycles. This is Fonterra the corporate player, the mover and shaker it was always touted to be. This is the company that attracted the up-and-coming Ferrier and his young family from the other side of the Pacific.

The speed at which Fonterra publicly unleashed the takeover - less than a week after Ferrier's call to Margin - appears to have stunned the National Foods board.

But they, in turn, have wasted no time in rejecting the bid.

Just hours after receiving notice of the takeover, National Foods released a statement leaving no doubt this was hostile.

Fonterra's bid - A$5.45 a share, a 21 per cent premium on National Foods' share price in the month prior to the offer - was "grossly inadequate", the company said.

The bid values National Foods at A$1.62 billion ($1.75 billion). As Fonterra already owns 17.2 per cent it, will need to fork out just $1.45 billion - money it will raise as bank debt.

Yesterday, National Foods kept up the pressure, releasing an improved profit forecast and talking about rival bids.

At a press conference, Margin confirmed that this country's richest man, Graeme Hart, owner of New Zealand Dairy Foods, had talked to National Foods within the past six months.

Hart is typically saying nothing. But there is little doubt he has talked to nearly every sizeable food company in Australia in the last six months as he has tested the waters for potential acquisitions.

Australian analysts and fund managers say it is unlikely a rival bidder for the business will emerge. The most obvious contender was former cornerstone shareholder and Fonterra rival Dairy Farmers, but it sold out of National Foods last week.

Nevertheless, Australian investors are holding out for a better offer. The National Foods share price has soared in the past two days, closing at A$5.68 yesterday, 23Ac above Fonterra's offer price.

Ferrier remains unfazed.

"There is going to be lots of rhetoric," he said. "We expected the board to do whatever they could to try and get the price up."

The only leverage they really had was to convince shareholders their long-term strategy could bring more value than what Fonterra had put on the table, Ferrier said.

"If they can do that, I guess they are hoping to see if Fonterra can raise its bid. We're saying shareholders just need to vote for themselves."

Shareholders would get that chance, a National Foods spokesman said yesterday. The takeover would follow the normal process.

A formal bid will go to National Foods next week. It will respond with a target-company statement and an independent valuation within a few weeks.

At that point, it will be up to shareholders, with the offer due to close in mid-December.

The National Foods spokesman said the reason the board's public rejection had been quick was that the bid was so incredibly low.

"It's not a margin call," he said. "This is an opportunistic bid."

Ferrier said he was not surprised by the National Foods statements but was "a little disappointed by the tone".

"I don't want to have a scrap in the media and it's not my intention to descend into verbal battles, but we will reinforce our point where it's needed."

He remains adamant that the offer price is more than fair.

While he stops short of threats to walk away from the deal, he says Fonterra does have other options for expansion it can follow up.

"Fonterra will not chase this price to the moon for the sake of an acquisition," he says.

Australian fund managers and analysts have called the offer fair but they remain optimistic that Fonterra will have to raise its bid - by about 20c a share at least.

"What it boils down to is how much you pay for the recommendation of the board," one fund manager said.

If the big financial institutions were reasonably happy with the price, then they were less likely to be concerned about what the board thought. But there were plenty of private investors that would care, he said.

Without National Foods' board support it may be hard for Fonterra to win 100 per cent. But convincing just 22 per cent of shareholders will give it control.

The fund manager said there were plenty of National Foods shareholders who would be ecstatic about this offer, even at A$5.45.

In the end that might be enough for Fonterra.

If it gets control it will achieve a good chunk of its ambitions: a portfolio of consumer brands, a foothold in the rapidly growing Asian market and a reduced reliance on commodity products.


The offer

A$5.45 a share.

A 21pc premium on the average market price over the past month.

Values the company at A$1.62 billion.

Conditional on National Foods ceasing all merger talks with canned fruit company SPC.

Conditional on 50pc acceptance.

Offer due to close mid-December.