Windfall on the cards for Fonterra

By PHILIPPA STEVENSON agriculture editor

Fonterra could make a profit of $62 million or more on its investment in National Foods as the Victorian company's share price rides high because of speculation the Australian dairy industry is on the brink of consolidation.

National Foods, Australia's largest listed dairy company with more than $1 billion in turnover, is widely seen as the key to industry rationalisation.

Its three largest shareholders - Fonterra, France's Danone dairy company and Australia's Dairy Farmers - took their stakes to bring about structural change.

Deutsche Bank is recommending selling the stock, which it says is trading at a 20 per cent premium to its value, at prices ranging from $3.51 to yesterday's $3.56 a share.

National Foods' share price would be at the upper limit an acquirer would be prepared to pay, taking into account any potential merger synergy benefits, said Deutsche Bank food analysts Ray Gin and Brett Corkery in a report to clients this month.

The analysts said Fonterra chief financial officer Graham Stuart's comments, reported in the Business Herald in December, that the company could reconfigure its Australian investments rather than make further acquisitions could lead to the sale of National Foods shares.

"It could sell its holding to a potential inquirer and do well out of the investment."

It calculated Fonterra got its 18.9 per cent or 51 million shares in National Foods for around $119 million at an average of $2.33.

If Fonterra sold at $3.56 a share it would make a profit of just over $62 million.

But other analysts suggest the stake, bought by Fonterra forerunner New Zealand Dairy Group between September and December 2000, could have been bought at an average of $2.26, adding a further $4 million to the bottom line in a sale.

Fonterra could do with the $181 million the sale could realise. It has said low commodity prices and the rising New Zealand dollar have cut its profit and the expected payout to farmers by $1.9 billion, or 32 per cent, on last year's result.

Fonterra dropped its expected payout to $3.60 a kilogram of milksolids last week in the third reduction in a year since its initial forecast of $4.50.

Put into payout, the share sale proceeds would give each of its 13,000 shareholders nearly $14,000, equal to around 20c a kilogram of milksolids.

Deutsche Bank said Danone - with 10.1 per cent of National Foods and the last of the three major shareholders to buy in, paying the highest price of $3.50 a share - might sell out at a lower price only if it could buy part of the business.

Dairy Farmers, with 9.8 per cent, was the most logical to merge with National Foods as it was in direct competition in drinking milk and manufactured products. However, the competition watchdog, the Australian Competition and Consumer Commission, might not allow the merger unless the new company disposed of its market share in drinking milk, the analysts said.

National Foods, with 41 per cent of the drinking milk market, unsuccessfully tried to buy the co-operative Dairy Farmers (35 per cent of drinking milk) in 2001 but Deutsche Bank said it might be a different story if Dairy Farmers was initiating the consolidation discussions.

It said a merger between the two would yield synergy benefits in the drinking milk market and provide a greater presence in the manufacturing segment in competition with Murray Goulburn and Bonlac, the two largest Australian dairy producers, which announced merger talks in January. Fonterra has a 25 per cent stake in Bonlac.

A merged Murray Goulburn and Bonlac would account for 70 per cent of milk produced in the main dairy state, Victoria, and control more than 80 per cent of Australia's dairy exports but would not be expected to have a significant impact on National Foods, which is not a major exporter.

A break-up of National Foods appeared to be more logical than an outright acquisition, with Danone and Fonterra, through its Australasian Foods Holdings, likely to be interested in the Yoplait yoghurt licence and possibly the dairy snacks business.

National Foods will report its half-year result to December on February 28.