Fonterra is poised to crystalise huge losses by selling down its shares in Chinese infant formula manufacturer Beingmate at less than a third of what it originally paid for its stake.
The actual investment loss could run into hundreds of millions of dollars, although Fonterra has already written down the investment by more than $430 million on its balance sheet.
The dairy co-operative this morning confirmed its intention to sell a portion of its 18.8 per cent stake with chief executive Miles Hurrell saying the decision was part of Fonterra's three-point plan to turn around its business.
Fonterra paid 18 yuan per share for its Beingmate shares for a total outlay of NZ$755 million as part of a joint venture partnership. It has since written down the carrying value to $204m after a string of heavy losses decimated Beingmate's market value.
Beingmate shares last traded on the Shenzhen Stock Exchange at 4.94 yuan.
Fonterra has been reviewing its overseas businesses since reporting a historic first annual loss of $196m and debt of $6.2 billion last year. The poor figures reflected a $439m write-down on Beingmate.
"We have talked to a number of parties regarding the potential sale of our entire stake in Beingmate, but so far have been unsuccessful in finding a buyer," Hurrell said in a statement.
"As a result of this, we are now considering selling part of our holding and, as required by local listing rules, need to pre-announce our intention."
Under Shenzhen Stock Exchange rules it is only possible to sell up to 1 per cent every 90 days directly on the exchange, or sell up to 2 per cent in a single block every 90 days.
However, trades greater than 5 per cent can be made to an individual party in an off-market transaction.
"From here, it's about making pragmatic decisions to get the best outcome for the co-op from our holding in Beingmate," says Mr Hurrell.
Fonterra has already unwound its joint venture arrangement with Beingmate, taking back full ownership of the Darnum manufacturing plant in Australia.
When Fonterra invested in Beingmate in 2015 it said the deal would give access to the lucrative Chinese market for its infant formula and other products.
Beingmate originally had sole rights to distribute Fonterra's popular Anmum brand in China but that ended as the two companies fell out over strategy and governance issues.
In February 2018 Fonterra's two designated directors on the Beingmate board - Johan Priem and Christina Zhu - broke ranks and refused to sign off on the company accounts when it recorded a preliminary net loss of $211 million for the 2017 financial year.
Along with independent director Liu Xiaosong they said they could not guarantee the contents of the annual profit announcement while expressing concerns about possible asset impairments and internal control of the company.
The three directors said they could not verify the company's disclosures were not false, misleading or inaccurate.
Beingmate has since undergone a restructure, selling assets and reappointing founder Xie Hong (also known as Sam Xie) as chairman.
While the company returned to profit last year, it recently issued a profit warning on July 13, saying its half-year result was likely to show a loss of 110m-150m yuan ($24m to $32m).
Hurrell said China will always be one of Fonterra's most important markets.
"We've got a strong business there and are still very much focused on the areas in China where we can succeed."
As part of its asset review, Fonterra has started a sale process for its 50 per cent stake in DFE Pharma - a joint venture with FrieslandCampina which supplies bulking agents, or excipients, in medicines including tablets and inhalers - and ice cream maker Tip Top.
It is also reviewing its two farm hubs in China, considering options for the future ownership of its Brazil joint venture with Nestle, and is closing its Dennington factory in Australia.
Fonterra will update shareholders when it announces its annual result in September but has repeatedly said it was on track to reduce its debt by $800 million in the year that ended July 31.