Another option, the company says, is retaining ownership.
Asked what it would use capital from potential partial or full divestment of the business for,the company said in a statement it was only at the stage of exploring options.
“No decisions have been made. There are still multiple pathways we could take. We will provide more updates when we can.
“We will be exploring the full range of options for a potential divestment - with a view to creating the best value for the co-op.
“Options could include a full sale of the whole consumer and associated businesses to another party, a partial sale, or divestment of different parts to different buyers or an IPO. Retaining ownership is always an option.”
Any decision about the use of net proceeds from a sale would be guided by Fonterra’s “resource allocation framework”, which allocated funds to debt reduction, investment to support strategy, and distributions to shareholders and unit holders, the statement said.
New Zealand’s biggest business and leading dairy exporter has surprised the industry and public with its announcement it is considering options for selling its $3.3 billion revenue global consumer business, and its integrated businesses Fonterra Oceania and Fonterra Sri Lanka.
Fonterra Oceania was created recently by combining the Australian business and the New Zealand consumer brands operation.
The farmer-owned cooperative said it believed it could grow further value by focusing on being a business-to-business provider of dairy nutrition through its ingredients and food service.
A divestment of this size will need 50 per cent backing by farmer-shareholders in a vote. “This could change if we decide to retain parts of the in-scope business,” the statement said.
The announcement received mixed reviews.
The investment market welcomed the prospect of a sale or sales, while other commentators noted the potential loss to New Zealand of popular homegrown brands including Anchor, Mainland, Kāpiti, Anlene and Anmum.
Some social media punters accused Fonterra of “valuing down”, assuming it was abandoning its long-stated pursuit of a “value-added” product growth, popularly seen as being achieved in finished consumer products, not commodities.
But as a veteran industry insider noted to the Herald, “a co-operative is not a natural home for a capital-intensive consumer strategy”.
New Zealand dairy exports, led by Fonterra, were valued at $26 billion last year. Photo / Alex Burton
“There’s nothing wrong with being in ingredients as long as you are at the bottom of the cost curve,” said the observer, who declined to be named.
He noted that aside from Waikato blue chip co-operative exporter Tatua, there was little value-add manufacturing activity and production by other dairy companies in New Zealand.
There’s also a view in the $20b dairy export sector that “adding value” creates a major problem around how that value is recognised back to the farmer-shareholder.
“A disengaged industry won’t invest or innovate and that naturally drives a different strategy from Fonterra,” one observer said.
Fonterra did not respond to the Herald’s questions about the capital intensity required, or the challenge of how adding value is recognised back to the farmer.
It said if it proceeded with a divestment “we would remain committed to shifting more milk into higher value products ...”
Fonterra said it had “unique expertise” in dairy science and innovation which made it a leader in the manufacture of dairy proteins and other advanced food solutions.
“Ingredients and Foodservice is where Fonterra can best apply this expertise, along with manufacturing and customer-partnering capability to earn greater returns from farmers’ milk and capital.
“Fonterra’s Ingredients and Foodservice businesses have complementary products, manufacturing processes and go-to-market approaches. Whereas the Consumer businesses utilise different product formats and require specialised expertise and marketing approaches to reach consumers,” the statement said.
“We believe prioritising the Ingredients and Foodservice channels and releasing capital in the Consumer businesses would generate more value. Furthermore, a divestment of these assets would help create a simpler, higher-performing co-op with our focus on our core business and doing what we do best.”
Fonterra did not believe it was the highest value owner of the consumer and associated businesses in the long-term, the statement said. A new owner with the right expertise and resources could unlock their full potential.
Fonterra expects the divestment consultation process to take 12-18 months.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
