Fonterra will be forced to dig deep

Dairy giant Fonterra looks as though it will have to pay up if it is to trump the A$1.78 billion ($1.9 billion) competing offer for Australia's National Foods, maker of Yoplait yoghurt.

Its rival, Philippines brewer San Miguel, which has bid A$6 a share for National Foods, has disclosed that it has not set any deal-breaking conditions on its offer.

San Miguel revealed the conditions in its bidders statement lodged with the Australian Stock Exchange yesterday.

Fonterra hoped for onerous conditions, on which it could offer concessions, potentially limiting the amount of cash it put into any new offer.

However San Miguel set out a benign programme of change for National Foods, ensuring the Australian firm would be better disposed to its bid.

Subject to a full review of National Foods business San Miguel said it would run the business as it is now, including retaining National Foods' management, employees and processing facilities.

It would use National Foods to secure raw ingredients for San Miguel's dairy business and look at co-operation in Australia, where San Miguel has a half share in the juice maker Berri and the Tasmanian brewer J Boag & Son.

It also promised to "investigate ... the expansion of National Foods' export business, especially throughout Asia".

It said a particular focus of this expansion would be the dairy sector, using San Miguel's knowledge of the Asian market.

Fonterra's A$5.45 a share offer values National Foods at A$1.62 billion.

It must now lift that bid to at least A$6.17 if it is to prevail, Australian observers say.

This lifts the value of its bid to A$1.83 billion. However, the cash cost will be A$1.5 billion as it already has a 20 per cent stake in the company.

Fonterra will respond to San Miguel's offer by February 8, seven days ahead of the closure of its bid.

The competitive tension is a test for Fonterra's chief executive, Andrew Ferrier, 18 months into the job.

If he is to achieve his ambition of building Fonterra to compete with international giants such as Nestle and Danone he has to expand into high-value consumer products in Australia.

But many farmers are worried about the co-operative outlaying such a huge sum on a consumer products business - an industry in which it has a patchy record. Some would prefer him to sell Fonterra's National Foods shares to San Miguel, making a one-time gain of as much as A$15,000 for each of its 12,000-plus farmer shareholders.

Meanwhile San Miguel was borrowing US$1.85 billion ($2.6 billion) to pay for the acquisition, two bankers involved in the loan said.

ABN Amro, Barclays, HSBC, Standard Chartered and Sumitomo Mitsui Banking would be the biggest lenders, said the bankers, who asked not to be named.

There might be as many as nine other banks joining the nine-month loan by February 4, they both said.

San Miguel would use $1.4 billion of the loan to buy National Foods if its bid were successful.