Fonterra chair Peter McBride (left) and chief executive Miles Hurrell at the Lactalis announcement. Photo / NZME
Fonterra’s farmer shareholders will discover the fate of their investment in the co-op’s Consumer and related businesses when voting closes on Thursday.
Indications are that they will give a green light to the $4.2 billion sale to France’s Lactalis which, if it goes ahead, will be one of the biggest single transactions the market has seen in recent years, and one of the most consequential.
Fonterra is targeting a tax-free capital return to farmers of $2 per share from the transaction, or about $400,000 in total for an average farmer.
The sale, which includes a long-term agreement for Fonterra to sell milk and ingredients to Lactalis, is expected to go through in the first half of next year.
At stake is Fonterra’s global Consumer business (excluding Greater China) and Consumer brands; the integrated Foodservice and Ingredients businesses in Oceania and Sri Lanka; and the Middle East and Africa Foodservice business.
The deal involves the sale of some of Fonterra’s most recognised brands, including Anchor and Mainland.
Fonterra says the capital tied up in its consumer business - while profitable - is better directed to its Ingredients and Foodservice businesses, which offer better returns on the capital employed.
While $3.2b will be returned to farmers, Fonterra aims to retain about $1b to invest over the next three to four years in projects to generate further value through its remaining Ingredients and Foodservice businesses.
ASB chief economist Nick Tuffley says Fonterra’s capital return would represent a “meaningful financial uplift” for dairy farmers.
“The average return would be around $392,000 if the sale goes ahead, and we estimate around 60% of shareholding farms could receive at least $200,000,” he said in a report.
“While many farmers are likely to save or pay down debt to some extent, their investment in cost-saving upgrades and equipment is expected to indirectly lift demand in these sectors,” he said.
John Stevenson, chairman of the Fonterra Co-operative - Council which oversees shareholders’ interests - said the co-op’s meetings and webinars on the sale had been well-attended.
“From the conversations that I’ve had, and from what councillors have had with farmers, we’ve picked up a strong degree of positivity,” he told the Herald.
Voting started on October 7.
The resolution requires a simple majority of over 50% and a result should be known on Thursday.
If the vote fails, the transaction will not proceed; a capital return will not be made; and Fonterra will continue to own the consumer and associated businesses.
Garry Reymer, a Fonterra shareholder-supplier who farms near Cambridge, told the Herald he had already voted.
“I’m definitely for it,” he said.
“I’m a supporter, 100%.
“I’ve been to a couple of meetings and there have been very few dissenting voices.
“You always get a couple, but they’re not strong.
“Maybe there’s a silent majority out there, but I think the consensus is that they have accepted management’s position and the board’s position that this is the right thing to do, and that we need to refocus as a company.
“I think the message has been heard and largely accepted.”
He pointed out the assets in question only take 7% of Fonterra’s milk supply - not much in the grand scheme of things.
The deal has attracted some political pushback, and some unfavourable letters to the Herald.
New Zealand First leader Winston Peters questioned how long Fonterra would remain a supplier of milk to Lactalis after the sale.
“Is Fonterra’s ‘long-term agreement’ for three, four or 10 years? Whatever the number, the clock will stop and New Zealand’s milk will become just another in a long line of milk jugs,” Peters said.
Under the terms of the deal, Lactalis has agreed to take Foterra’s milk for an initial term is 10 years, after which it automatically renews until terminated, with a 36-month notice period.
Reymer said in the unlikely event of Lactalis ceasing to take Fonterra’s milk, it would allow the co-op to divert milk to the higher-yielding Ingredients and Foodservice businesses.
“The message is that Lactalis is going to want our milk, long-term.
“They want the brands but they still want our milk because it has a good story.
“They want it for the low carbon footprint which they’ll use in, in their own marketing, so I’m not worried.”
In a letter titled “And another one bites the dust”, Tim Hazledine, emeritus professor of economics at the University of Auckland, said the sell-off of New Zealand’s corporate assets continued with Fonterra’s disposal to a French family of most of its consumer products business.
“Corporations and thus countries don’t get richer by selling productive assets, and New Zealand hasn’t,” he said.
“Instead of exulting over the start of ‘one of the most exciting phases in Fonterra’s history’ (August 23), the chairman, Peter McBride, and his executive team should be hanging their heads in shame at having been unable to develop the value of the company’s retail businesses to the point of them being beyond the reach of a foreign takeover operator.”
Reymer said the deal would offer a capital injection for some but for others, it will make up for lost capital if they happened to buy in at higher prices than prevail today.
“A lot of farmers would have bought shares north of $5, so for some it will just be matter of getting capital back,” he said.
Reymer said there was a lot more confidence generally around Fonterra.
“The confidence around Fonterra has ebbed and flowed over the years.
“There have been times when we felt really good about it and times when the tide went out then came back in.
“But we’ve got a spring tide now and I feel extremely positive about it.”
The council’s Stevenson said there had been good engagement from farmers.
Fonterra was formed in 2001 after farmers voted in favour of merging the New Zealand Dairy Board, New Zealand Dairy Group and Kiwi Co-operative Dairies.
Since then, the co-op’s performance has been mixed, and punctuated by ill-advised investments such as a stake in China’s Beingmate for $755m, which was later sold at a big loss.
However, a slimmed-down Fonterra - courtesy of a number of big asset sales - has performed better in recent years.
Stevenson said the sale of Consumer to Lactalis was a significant decision for farmers “because the future does look quite different post the divestment”.
“We’ve gone pretty deep into this, as we should as a representative body.
“If you put the capital return to one side, we’re going to continue to supply milk for hopefully generations to come, so we need to have the confidence that our co-op will deliver into the future,” he said.
The council engaged Northington Partners to provide an independent assessment of what Fonterra put to farmers.
“Northington came back and indicated that Fonterra looked like a better business, post this divestment, and that they would have the capital to be able to make their short to medium-term investment plans.
Fonterra has said it intends to return to 2025 earnings (net profit $1.079b) by 2028, despite the absence of a contribution from Consumer.
“The commitment that Fonterra has made to return to this past year’s earnings by 2028 gave the council a lot of confidence that the future of Fonterra, with it focusing on Ingredients and Foodservice, does look like a more repeatable business for Fonterra as a farmer-owned co-op.”
Stevenson said Fonterra farmers were “a broad church”.
“We’ve got a number of farmers that have a real emotional connection to the brands, and you can understand that.
“We also have a lot of farmers who have looked at the rationale and the financial data and have a lot of confidence in the direction going forward,” Stevenson said.
“Fonterra farmers also have a strong history of making the right decision when it comes to long-term structural decisions within the co-op.”