Talks clear way to China deal for Fonterra

By FRAN O'SULLIVAN assistant editor

Fonterra's plans for a stake in the Chinese state-owned dairy company Sanlu are set to be rubber-stamped by Beijing after top-level talks in New Zealand this week.

Fonterra chief executive Andrew Ferrier said yesterday he was "very encouraged" following detailed talks with visiting Chinese envoy Ma Xiuhong.

Ferrier revealed he had "a fair amount of discussion" on the Government approval process with the Chinese Vice-Commerce Minister and her officials at a one-hour meeting in Christchurch.

"She was extremely helpful," Ferrier said. "She was very clear to me that this is the type [of investment] that they encourage and under no circumstances was I given any view that there would be a problem in getting it approved.

"They were extremely forthcoming on giving us advice to make sure the process goes as smoothly as possible."

The company yesterday confirmed it is negotiating for a major stake in Sanlu - not merely a joint-venture operation as reported earlier - which it expects to be finalised within the next few months.


Investment banking sources suggest the initial stake could be as low as 40 per cent in line with common practices for foreign companies buying into Chinese entities.

Chinese-sourced reports suggest Sanlu will be listed on the Chinese stockmarket through an initial public offering after the Fonterra stake is bedded down.

But Ferrier says he did not seek Ma's attitude to an IPO. "We're not thinking that far ahead."

Negotiations between Fonterra and Sanlu, which is one of the top six Chinese dairy companies, have been under way for more than two years.

Ferrier said he was "particularly encouraged" by the Chinese delegation's upbeat attitude towards dairy and increased New Zealand investment in the sector.

"Although they are proponents of a domestic dairy industry they know their consumption is going to very substantially outstrip any capacity they have to provide dairy productions for their populations.

"They see New Zealand as a strong trading partner in dairy.

"I was probing on what was the investment climate going to be like for the future as well," he said. "Again very positive signals from her that they feel that the policies towards foreign investment are getting increasingly better over time and they are going to continue to try and make the process even simpler in the future."

Fonterra's Asia sales were $3.3 billion in the 12 months to May last year - 27 per cent of its total worldwide sales.

New Zealand has a 67 per cent share of the Chinese milk powder market. Dairy last year superseded forestry products to be the largest New Zealand export item in China.

Fonterra's Asia regional managing director Brent Taylor told the Seriously Asia forum in November that he expects continued record growth from China.

Ferrier said the Sanlu venture would be a "great platform" to expand Fonterra's China operations. It was encouraged by the role that the Ma meeting could play in the company's future.

"To be dealing with a Government official at that level and to have such positive signals and a co-operative attitude is extremely positive.

"It certainly encourages me and will encourage the organisation to continue to look at China for further opportunities."

But he played down suggestions that Fonterra might run its ruler over the Chinese operations of the troubled Parmalat group. It was "too premature" to start reading too much into the Parmalat situation in terms of which assets (if any) will be available and which won't.

"Having said that, Fonterra, like many other companies, is watching and analysing with interest the whole situation," said Ferrier.

"We carefully prioritise our m&a activity, and should anything of Parmalat become available, we will look at it together with our other priorities and make a decision at that time."