Fonterra is New Zealand's biggest business and some of its brands are many decades old.
Fonterra is New Zealand's biggest business and some of its brands are many decades old.
A full divestment of Fonterra’s consumer products businesses has major implications for the dairy co-operative and its shareholders with a full exit potentially returning up to $3 billion or about $2 a share of capital, a new report says.
Independent investment bank Northington Partners, in a report commissionedby Fonterra’s farmer-owner watchdog the Fonterra Shareholders’ Council, said while the potential value of the “in-scope” businesses is subject to market testing and is “highly uncertain” until offers are received, several valuation reference points are available.
Little information on the review has been available from New Zealand’s biggest business, but its 7800 farmer-owners expect more detail at their annual meeting this month.
Based on Fonterra’s target debt levels and its current debt position, Northington says it believes most of any sale proceeds could be returned to shareholders with Fonterra maintaining its A-band credit rating.
“A value of $3b-$3.4b for 100% of the in-scope businesses represents approximately $2 per share.
“While the level of capital that will be returned to shareholders ... will be influenced by a wide range of factors (including seasonal working capital requirements and expected capital expenditure), it could be material relative to the current share price.”
The in-scope businesses include well-known consumer brands in New Zealand and Australia, including Anchor, Mainland, Kāpiti, Perfect Italiano and Fresh’n Fruity, plus the Australian manufacturing and ingredients businesses.
Northington says the in-scope businesses are a material component of the co-operative, accounting for almost 30% of Fonterra’s capital employed. Despite improved performance in FY24, the assets contributed only about 17% of ebit for the year.
“The in-scope businesses represent significantly more than just the consumer channel, with a material level of capital invested across the entire Australian dairy value chain (collections and processing through to consumer brands and food service), the New Zealand consumer and food service businesses, global consumer brands and Sri Lanka.
“We note the poor recent returns of the in-scope businesses are materially impacted by the relative underperformance of Fonterra Australia.
“This is partly attributable to unsustainable prices for milk in Australia over the last three seasons as a result of the prevailing competitive landscape ... excluding Australia, we suspect that the performance of the in-scope businesses would be within Fonterra’s previous return on capital targets (8%-10%),” the report says.
“The inclusion of Fonterra Australia as part of the in-scope businesses follows on from the strategic review of that business unit which was announced in 2021, but which did not lead to any divestment or significant restructuring.
“Wrapping the Australian business together with the broader global consumer business could be more appealing to prospective purchasers and is likely to attract more interest than Fonterra Australia on a stand-alone basis.”
Australia provides 6.8% of Fonterra’s total milk supply, representing about 16% of Australia’s total milk collections.
The combined in-scope businesses represented 14.3% of Fonterra’s total sales volumes.
Fonterra Co-operative Council chairman John Stevenson. The council commissioned Northington Partners to report on the dairy co-op's suggestion it may exit its consumer businesses.
The report says $3.4b or 30% of Fonterra’s total capital employed is in the combined businesses, the significant majority of which is invested across processing/manufacturing in Australia and New Zealand.
The businesses recorded FY24 revenue of $5.4b. Ebit was $282m ($79m Australia and $203m New Zealand and rest of the world) compared with total group ebit of $1.61b.
Northington says consistent with Fonterra’s own rationale, it identified some of the potential benefits of divestment may include concentrating Fonterra’s effort on its core business of collecting and processing milk while stabilising supply and improving processing efficiency.
Other benefits might be simplifying the co-operative with a focus on maximising returns from core operations, prioritising investment, and providing the opportunity for better return on capital.
“In addition, we consider that the potential sale should result in reduced capital expenditure currently required to support the in-scope businesses.
“We also note that the potential sale .... may result in an upward ‘re-rating’ of the Fonterra share price depending on the price achieved and level of capital returned to shareholders,” he said.
“This is largely due to the potential scale of the capital return compared to the current share price (50% of the farmers-only market price) while a sale would have less impact on earnings, only reducing by 20% (based on FY24 pro-forma estimates).”
Any material divestment will probably require shareholder approval.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
