“In a journey that started with balance sheet repair (Tip Top divestment) and extended into a greater focus in strategyto the core NZ milk pool (Soprole exit) which also supported reduced capital intensity ($800 million capital return), Fonterra has made the boldest call yet, announcing its intention to progress with divestment of its Consumer businesses,” Dekker said in a research note.
Collectively, the assets represent $3.4 billion of invested capital.
A divestment would pave the way for a significant return of capital given an already-strong balance sheet and the defensive assets that will underpin post-divestment Fonterra, Dekker said.
“We have long highlighted the benefits we see from greater focus in New Zealand sourced Ingredients/Food Services, where growth optionality remains but in an area where Fonterra has greater strengths.
“Fonterra has listened while being patient, possibly looking to prepare the assets so they are attractive for exit.”
Dekker noted that Fonterra had last year decided not to progress with a previously proposed divestment of its Australian business.
Fonterra is looking at full or partial divestment options for some or all of its global consumer business, including well-known brands such as Anchor, and its integrated businesses Fonterra Oceania and Fonterra Sri Lanka.
Chairman Peter McBride said yesterday it was a significant move for the co-op, which would set it up to grow long-term value for farmer shareholders and unit holders.
Dekker pointed out that the process may take 12 to 18 months so there was “considerable” water still to flow under the bridge, and shareholder approval would be required.
“With the balance sheet already in strong shape following recent performance, we highlight a return of capital up to $2/share is possible if Fonterra can achieve $3.4b book value while the remaining business would have a book value a touch under $3/share.
He said $3.4 billion in sale proceeds was within the realms of possibility.
Jarden head of research Arie Dekker. Photo / Supplied
“If Fonterra can attract strong trade interest in particular and position the businesses with some growth prospects remaining post FSF repositioning, then a gain on book may be possible,” he said.
“With Fonterra demonstrating its focus in the core business, we remain positive.”
“The combination of strong earnings and a greater focus on the core business has delivered very strong returns for the co-op in the past 18 months,” Dekker said.
Fonterra’s balance sheet has been in better shape in recent years after selling Soprole in Chile, and other assets in Brazil and China.
Forsyth Barr analyst Matt Montgomerie said he was supportive of the move.
“Assuming the planned divestment goes ahead, we think the decision is sensible given: (1) Consumer in particular has been extremely volatile over many years, (2) it continues to streamline Fonterra’s business towards its core competency, and (3) possible attractive divestment value.”
Montgomerie said in a note historical evidence suggested cash proceeds of $2.5b to NZ$3.5b from the divestments were possible.
Fonterra chief executive Miles Hurell said following any sale, he expected Fonterra would continue to supply the Consumer business in much the same way as it did with icecream maker Tip Top, which it sold in 2019 to icecream giant Froneri for $380 million.
The sharemarket continues to react favourably to Fonterra’s planned moves.
By early afternoon, the farmer-only Fonterra shares had rallied by 34 cents or 13.5 per cent to $2.86 while the unrestricted units gained 2c to $3.68.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
