Fonterra pulls out of bidding for Nat Foods

New Zealand's biggest company, Fonterra Co-operative Group Ltd, says it is pulling out of its bid for Australia's only listed dairy company, National Foods.

Fonterra will sell off its own 19 per cent stake in NatFoods, Fonterra chief executive Andrew Ferrier said in a statement to the stock exchange.

Mr Ferrier said that Fonterra's preferred course of action would have been to complete the acquisition of National Foods, but it was now clear that "increasing Fonterra's offer would not be in the best interest of its shareholders".

Fonterra intends to accept San Miguel Corporation's offer of A$6.40 per share, if that offer is unconditional.

Fonterra's average purchase price for its 56.5 million shares was A$2.68, ($2.91) a total of A$151.4 million. The shares will sell for A$361 million, giving a gross profit of A$210 million.

In addition, Fonterra received total dividend income of A$45.5 million during the period of its investment, which began in October 2000.

This means that it will walk away with a potential war chest for further Australian acquisitions of A$255.5 million ($278 million) from the combined dividends and sale of shares.

Fonterra said the A$6.40 sale price equalled the highest price paid for National Foods shares on the Australian stock exchange (ASX) before San Miguel's revised offer of April 6, and was towards the top end of the National Foods Board's valuation of A$6.01 to A$6.55.

Mr Ferrier said that at this price other growth options in Australia outstripped the National Foods opportunity, so it was time to "crystallise" a significant profit for Fonterra shareholders.

The proceeds from the sale would be retained to fund these future growth initiatives.

"We have consistently said that we would only pursue the deal at a price that represented good value for our shareholders," Mr Ferrier said in a statement.

Analysts have said the cost savings available to Fonterra over three years in a successful takeover of National Foods would have been A$30 million and A$50 million, because of synergies with its existing operations in Australia.

But an Australian analyst said if Fonterra had lifted its bid to A$6.44, half the value of the synergy benefits would have been handed over to NatFoods shareholders, and a bid of A$6.62 would have effectively paid away 60 per cent of the synergies. Fonterra did not disclose what its own forecasts were.

Mr Ferrier said Fonterra had disciplined investment parameters and believed its offer represented full and fair value for National Foods.

"It would not have been prudent to go any higher," he said.

Fonterra has said its bid of A$6.20 was neutral to mildly positive to payouts for its 12,200 dairy farmer shareholders, but a another analysis by Fonterra -- using more conservative assumptions for an official takeover document -- estimated the deal would have cut payouts by $142 million, or $11,800 a farmer, if it had been done in 2004.

This analysis did not include merger savings and improved National Foods' profits, but did include goodwill costs.

National Foods has the strongest yoghurt and flavoured milk brands in the much bigger and faster-growing Australian market, including Yoplait, which had a third of the yoghurt market and dominates the dairy cabinets of the two main Australian supermarket chains, Coles Myer and Woolworths.

National Foods also has the biggest single food supply contract with any supermarket in Australia -- an exclusive agreement to supply Woolworths with its milk house brands.

Mr Ferrier indicated Fonterra had not given up on mergers and acquisitions in Australia.

"We consider Australasia to be our domestic market," Mr Ferrier said. "Our businesses in Australia, which include leading brands such as Mainland and Bega cheeses, Brownes milk and yoghurts, and Connoisseur and Cadbury ice-creams, generate combined revenues of $1.4 billion, and we also process about 16 per cent of Australian raw milk.

"Although we had sought a controlling interest in National Foods as part of our wider development strategy for the Australasian market, we have other opportunities for organic growth and potential acquisitions in both our ingredients and Brands businesses."

He did not directly mention that NSW cooperative Dairy Farmers is also likely to be sold within the next year and Parmalat Australia is also seen as a takeover target.

Some analysts have suggested Fonterra could buy factories and distribution assets from either of these rivals.

Fonterra's capitulation on the NatFoods deal may leave Philippine brewer San Miguel with a beachhead on both sides of the Tasman, after reports that it has also succeeded in its purchase of Fonterra's main domestic rival, Graeme Hart's New Zealand Dairy Foods.

The trans-Tasman dairy buys will give San Miguel a platform to launch into Southeast Asia and China -- key strategic markets for which Fonterra has great ambitions.

- NZPA