Canada's Saputo, which last year bought Australian co-op Murray Goulburn, is eyeing up New Zealand's second biggest dairy co-op, Westland Milk, the Australian newspaper reported.

The paper said Saputo was also only vying for parts of Australia's Lion Drinks and Dairy.

The paper said Westland would offer Saputo a stronger foothold in the New Zealand market to take on industry giant Fonterra.

Westland has 429 farmer-shareholders.

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The Australian said Macquarie Capital is working on the sale.

Westland shareholders heard at last month's annual meeting in Hokitika that the co-operative's capital structure review had attracted a number of proposals from interested parties. More than 25 parties engaged with Westland on the process, the co-op said at the time.

Westland chairman Pete Morrison, in a statement to the Herald today, said: "Westland Milk Products has entered into strictly confidential discussions with a select number of interested parties."

Morrison said no comment would be made until the end of the process.

"As stipulated from the beginning of the process, the board intends to bring an option back to shareholders for their consideration and approval if it believes it meets their objectives," he said.

Shareholders will be updated on the process in March.

Westland is not the only New Zealand dairy co-op to face capital issues.

Fonterra is in the process of reviewing its assets in order to trim its debt, and is looking at selling its Auckland-based Tip Top operation.

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This month, Fonterra announced that it would sell its Farm Source livestock division to Carrfields Livestock – an established livestock agency provider.

Privately-owned Saputo bought Murray Goulburn - Australia's biggest dairy company - for A$1.31 billion.

Several major dairy companies, including New Zealand's Fonterra, had expressed an interest in the Victoria-based dairy group after it ran into financial difficulties.