Fonterra still exposed to Beingmate in Bubs supply deal

Fonterra Australia will supply Bubs with organic milk powder, sourced from New Zealand. Photo / File

Fonterra Cooperative Group will still be exposed to its former Chinese partner Beingmate Baby & Child Food Co, albeit one step removed, in a new supply deal with Bubs Australia.

Fonterra Australia will supply Bubs with organic milk powder, sourced from New Zealand and manufactured at its facility in Darnum, Victoria, Bubs said in a release to the Australian stock market yesterday. The conditional supply agreement runs until July 31, 2021.

The new Bubs Organic range of infant formula will be Australia's first organic grass-fed cow formula, and will be available in Chemist Warehouse pharmacies throughout Australia within three months, Bubs said. Exports to China's cross-border eCommerce channel will follow shortly thanks to a recently established joint venture with China's Beingmate.

In a separate statement, Bubs said it has formalised a joint venture created with Beingmate to distribute and promote Bubs goat and organic cow milk formula throughout Beingmate's network, including 30,000 Mother and Baby stores in mainland China.

The joint venture will be the exclusive authorised distributor for all Bubs' branded products. Bubs Australia has a 49 per cent stake while Beingmate holds 51 per cent.

The deal comes on the heels of Fonterra's experience with Beingmate that led to a $405 million writedown of the cooperative's Chinese investment after several years of underperformance.

The Bubs deal with Beingmate shows some of the hallmarks of Fonterra's partnership with the Chinese firm, which also put Beingmate as a 51 per cent shareholder of a joint venture to produce infant formula products at the Darnum plant in Australia for Beingmate's Chinese customers.

Fonterra said at the time that the deal was a key plank in plans to expand its reach into China's second- and third-tier cities.

It failed to fire and Fonterra unwound the investment earlier this year, taking back full ownership of Darnum. It's also considering options for its 18.8 percent stake in Beingmate.

Bubs, meanwhile, recently bought Australia Deloraine Dairy, an infant formula manufacturing facility that has been approved by China's Certification and Accreditation Administration.

The existing technical application for an organic cow milk formula submitted to the State Administration for Market Regulation on April 2, 2018 will now be transferred to Bubs Organic. Pending approval, the new range of formula may be physically distributed to China's Mother and Baby stores, it said.

"Super premium product offerings are the fastest growing segments of the infant formula category, and we are now able to offer two nutritional options - organic and goat - to suit individual dietary needs," Bubs Australia chief executive Kristy Carr said.

Bubs also said it formalised a strategic partnership with Alibaba's Tmall - a retail channel also used by Fonterra and A2 Milk Co - as well as the recently announced equity-linked alliance with the Chemist Warehouse.

In April, Bubs said it had reached a four-year strategic alliance with Chemist Warehouse that provides for an initial issue of 12,356,627 fully paid shares in Bubs, potentially rising to 37,069,881 upon shareholder approval and performance goals.

Bubs shares last traded at A$1.475 and have risen from 45.5 cents at the beginning of the year.