It always seemed odd to Fonterra chief executive Andrew Ferrier, a Canadian, that the company owned the Anchor brand overseas but had lost it at home to a billionaire.

That billionaire is Dairy Foods owner Graeme Hart, and this week he signed a $1.1 billion deal with Fonterra that gave the brand back to the dairy industry.

Fonterra, the country's biggest company and controller of 96 per cent of the raw milk supply, has made much of its "emotional" satisfaction in getting back the Anchor brand at home.

The near-monopoly farmer co-operative inherited Dairy Foods in 2001 through an industry mega-merger, but had to sell it to ensure domestic market competition.
Anchor ranked number five in ACNielsen's top 25 megabrands last year with sales of $102 million.

Fonterra is also pleased to be getting back the country's No 1 selling yoghurt brand, Fresh 'n Fruity. The yoghurt, which earned $49 million last year, is not sold in Australia and at the moment is air freighted to Asian markets - so Fonterra gets a lucrative new export opportunity, as well as Hart's superior yoghurt technology to transfer to its Asian manufacturing plants.

But there is much more behind the brands deal that took the local market by surprise this week.

Fonterra's spin machine is working hard to sell the deal as a simple brands swap that will not lessen domestic market competition or breach the 2001 Dairy Restructuring Act or raw milk regulations that were introduced to try to keep the dairy juggernaut honest.

But supermarket bosses and competitors are not buying it.

Also extremely wary will be many of the 1500 Fonterra staff who will go to work for Hart under the deal.

Hart runs lean, mean operations and some say they fear for their jobs.

Many of these 1500 are staff at the Kiwi Meats business that Fonterra has sold to Hart.

For the 800 Dairy Foods staff who will go to Fonterra, the future looks kinder.

Bankrolled by its 7000 or so dairy farmer owners, Fonterra is seen as a much softer employer touch.

Most details of the transaction are still secret or yet to be worked out, but it seems the deal will not impact on consumers.

The supermarkets will use their buying clout to see to that.

But what is causing jitters in the back rooms is the prospect that Hart and Fonterra will also strike some cosy deals over milk processing and raw milk pricing, especially in the South Island.

Dairy Foods has more than 40 per cent of the local market. Fonterra, barring some comparatively small rivals, has the rest.

Fonterra is the milk heavyweight in the South Island. Its Meadow Fresh brand, which Dairy Foods has bought in exchange for Anchor, is the dominant seller there. So now Dairy Foods will be the big player. (Meadow Fresh ranked No 6 in the top 25 megabrands last year, with sales of $95.5 million.)

Guess who Hart will likely buy his South Island milk supply from, says Foodstuffs Auckland managing director Tony Carter. Bang goes any price tension in the South Island between the two companies, he suggests.

Carter's opposite at Foodstuffs Wellington, Tony McNeil, has different worries.

His company owns Kapiti Fine Foods, which supplies Foodstuffs in the lower North Island with house-brand milk as well as smaller vendors such as dairies.

McNeil believes Hart negotiated a cheap raw milk price for Dairy Foods from Fonterra back in 2001. Under the complicated rules and regulations governing Fonterra's creation that year, Dairy Foods is entitled to 250 million litres of milk a year from Fonterra at a special price.

McNeil wants to know if Hart will still get a cheap price. He says that would be uncompetitive practice, and he is demanding a formal investigation into Fonterra's milk price charges to competitors.

Fonterra and Dairy Foods have no comment.

Detail is still being worked out, they say. But a Fonterra spokesman said it would be dumb to provoke the Commerce Commission or the supermarkets with anti-competitive arrangements.

"Common sense will prevail," he says.

Also worrying is Fonterra's ambition to buy Dairy Foods' butter business. There are two butter makers in New Zealand - Fonterra and Dairy Foods Anchor. If Fonterra gets Anchor butter it will have 100 per cent of the butter market, Carter says.

Ferrier is playing down the butter issue, claiming butter is a very small part of the national spreads business of which Fonterra is just a bit player.

But he knows he is on dangerous ground so is applying to the Commerce Commission for approval for the butter transaction.

Ferrier says there is no threat "whatsoever" to domestic market competition from this deal. The cheese market is not affected because Fonterra sensibly decided not to push boundaries by trying to buy back the Anchor cheese brand.

What will Hart do with his share of the spoils?

The publicity-shy entrepreneur isn't taking questions.

But his spokesman on the deal, long-time Dairy Foods chief executive Peter McClure, agrees that given Hart's track record of building businesses and selling them, he may sell on to Fonterra's arch-rival San Miguel.

The Philippine company, which has plans to be one of Asia's top 10 food and beverage companies, beat Fonterra to buy listed Australian company National Foods this year.

As a result San Miguel now owns the high-tech Yoplait yoghurt plant in Palmerston North. It was understood to be a rival bidder for the Dairy Foods brands.

Hart has acquired a Meadow Fresh production plant in Palmerston North with the deal. Go figure, say sources.

However, two things are against such a deal. First, while San Miguel has deep pockets, analysts say it has its hands full integrating National Foods and the Australian juice company Berri in which it has a 51 per cent stake.

In producing a lacklustre profit result yesterday, San Miguel said it was interested in buying out the Berri minorities, likely to cost around A$150 million ($166 million). It would not comment on its interest in Dairy Foods.

Food company analyst Pierre Grobler, from Australian brokerage CommSec, said that although San Miguel was a cash cow, it had its hands full. "They have ample funding capacity for another acquisition, it's just a question of whether it fits their strategy."

The other impediment to San Miguel/National Foods buying Dairy Foods has largely gone.

National Foods applied to buy Dairy Foods in 2002 but was blocked by the Commerce Commission because that would give it dominance in the yoghurt market. It would have combined Dairy Foods' 55 per cent share through Fresh 'n Fruity with National Foods' 18 to 20 per cent share through Yoplait.

However, in November, Fonterra helped clear the way for Dairy Foods when it applied for Commerce Commission clearance to buy National Foods.

The watchdog this time ruled combining Meadow Fresh and Yoplait would not substantially lessen competition. So while the No 1 player could not combine with any other player, the No 2 and No 3 players could team up.

The commission argued supermarkets could keep a market of just two main players honest with the threat of introducing house brands, as they have done in the liquid milks market.

Competition law and dairy industry expert Rob Noakes of Kensington Swan believes this is likely.

"In my view, that's what's going to happen. He [Hart] will sell off the Mainland brands, the Meadow Fresh and Tararua brands along with perhaps Kiwi and Huttons and make a bloody fortune again.

"He has a ready-made purchaser desperate to get in there - San Miguel wanting to get into Australasia. Fonterra is getting into Australia, so why not National Foods get into New Zealand?

"It's a big ask for San Miguel, but they are not a small company," Noakes added.

Grobler said that while Hart was keen on food companies and the dairy industry, and himself had ambitions to build a global food company, Dairy Foods did not fit well with his vehicle, listed Australian food giant Burns Philp, in which he had the largest shareholding.

Grobler does not believe shareholders in Burns Philp, which bought Australasian food company Goodman Fielder in 2003 for $2.2 billion, would be persuaded to buy Dairy Foods. Synergies are not readily apparent.

And what were Fonterra's real motives? Why didn't it get the brands sorted to its satisfaction in 2001?

At that time, when Fonterra had to toss up whether to sell Mainland or Dairy Foods to keep the competition regulators happy, Dairy Foods had a 50 per cent stakeholder in the shape of 6000 dairy farmers.

Mainland had a minority shareholder, Otago's McConnon family. Mainland, the more valuable company, stayed in the fold, and Ferrier says merger events were too complicated at the time to play brand swapsies.

Insiders say the horse trading for this deal was extremely tough. Dairy Foods was on the market, and at least five parties were bidding.

Fonterra negotiated with Hart for several months. Ferrier says the deal "could easily not have happened".

Why Hart chose a brands swap with Fonterra over a straight sale is unknown. McClure, who will transfer to Fonterra next month to head the new acquisitions, says he does not know.

It seems certain Fonterra would have fought hard to keep San Miguel out. But Ferrier says the $754 million it paid Hart (who paid $300 million for Dairy Foods in 2001) did not contain a premium for anything. It was "a very good deal", he says.

Foodstuffs' McNeil says Fonterra was driven to the bargaining table by the imminent arrival of Woolworths Australia, new owner of Foodtown supermarket chain parent Progressive Enterprises.

Dairy Foods is Progressive's house brand milk supplier, and National Foods, now owned by San Miguel, is Woolworths Australia's main milk supplier.

McNeil believes the deal will lock up a Woolworths contract for Fonterra and take a lot of the sting out of National Foods' designs on New Zealand.

Progressive merchandising general manager Mark Brosnan says it's too early to comment until a meeting with Dairy Foods on Monday. He says the deal won't affect customers though.

- additional reporting: NZPA