Fonterra is paying its second-largest dividend in its history. How the diary co-operative's finances and future have changed. Video / Editing | Corey Fleming
The high-level rationale for Fonterra’s potential exit from its consumer products businesses looks “reasonable” from a financial performance perspective, but shareholders will want significantly more information on its merits, says investment bank Northington Partners.
In an advisory to Fonterra shareholder watchdog, the Fonterra Co-operativeCouncil, Northington noted the “in scope” consumer business comprised around 30% of Fonterra’s capital employed but only delivered around 17% of FY24 earnings.
Northington thought it unlikely the information Fonterra’s farmer-owners would want before any vote would be available until “well into 2025″.
The business includes the recently integrated New Zealand-Australia business, Fonterra Oceania, home to brands including Anchor, Mainland, Kāpiti, Anlene, Anmum, Fernleaf, Western Star, and Perfect Italiano. The integrated Sri Lanka consumer business is also in the mix.
Little information has been available since. Sale advisers have been appointed.
The company indicated at its recent FY24 results that more information might surface at the annual meeting next month. Fonterra’s 7800 farmer-shareholders will need to approve any sale proposal.
Northington, as part of a summary of Fonterra’s FY24 performance for the watchdog council, said at a high level, the potential exit looked reasonable from a financial perspective.
“However, shareholders will be seeking significantly more information in order to make an informed assessment of the merits of such a significant step-change in strategic direction.
“Depending on progress with the potential sale ... this information is unlikely well into 2025, but should be expected to include details on value, use of sale proceeds (including the level of capital return to shareholders), implications for the brands, manufacturing and people, and the ongoing relationship between Fonterra and the purchaser (eg milk supply arrangements).”
Fonterra is assessing a full or partial sale of its global consumer products business, which includes the Anchor brand, a household dairy name.
Fonterra’s divestment proposal comes on the heels of a new strategic focus on its ingredients and food service channels.
It recently provided some key financial targets for the retained business, including higher returns – 10-12% return on capital compared to 9-10% currently – and a higher dividend payout policy, 60-80% of normalised earnings against 40-60% currently.
The farmer council has commissioned Northington to complete an independent analysis of the pros and cons of a consumer business sale.
In its latest quarterly report to farmer-shareholders, the council said it was keen to ensure they had the opportunity “over a good period of time to develop a strong understanding of what they were being asked to vote on and how it will impact their co-op moving forward”.
The council said it had sent the Fonterra board a list of “information of interest” it believed co-op members would value at this early stage.
The list was informed by farmer feedback and information available to date.
The council said its areas of focus and questioning about the change of business strategy and Fonterra’s performance measures included: assumptions underpinning the targets; frequency of reporting and updating the targets; comparative data for the key financial drivers to FY27 that excluded the consumer business; and the depth of the existing pipeline of ideas and initiatives that meet return on capital expectations.
Northington, in its summary of Fonterra’s FY24 performance for the council’s quarterly report, noted the board had provided earnings guidance of 40-60c per share for the 2025 financial year.
“However, the recent exhaustion of New Zealand tax losses means that this is not comparable to historic[al] earnings where dividends on [milk] supply-backed shares were treated as a tax expense and utilisation of tax losses contribution to lower overall tax expenses (higher post-tax earnings) at the company level.
“Normalising for the change in Fonterra’s tax status and higher-than-expected digital transformation costs, the current FY25 outlook implies underlying performance broadly consistent with FY24.”
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.
