Fonterra's $1 billion splash-out

The Chinese formula market is expected to double in the next five years.

$615m for 20 per cent stake in Chinese baby formula firm and $555m on new capacity at home.

Fonterra says it plans to spend about $1.17 billion on taking a 20 per cent stake in China's Beingmate Baby & Child to boost its baby formula aspirations there and on a major expansion of its New Zealand processing facilities.

In a move that follows several other significant strategic investments over the last 18 months, Fonterra said it would spend about $615 million on taking a 20 per cent stake in Beingmate, which has a 10 per cent share of China's infant formula market, and $555 million on installing new processing capacity in the Waikato and in Southland.

Fonterra has stayed out of the branding space in China after the furore caused when Chinese dairy company Sanlu, in which it had held a stake, was caught up in the toxic melamine scandal in 2008.

When asked whether Fonterra had done sufficient "due diligence" to avoid a repeat of the Sanlu experience, chief executive Theo Spierings said Fonterra was "completely" different to what it was six years ago.

"China is a completely different environment, Beingmate is a completely different partner, this is a completely different deal and last but not least we are also completely different from where we were five or six years ago," Spierings said. "We are very much focused on learning from the past and moving on into the future," he said in a video conference call from China.

The Chinese formula market is expected to double in the next five years. "If we want to be globally relevant, then we have to be part of the Chinese dairy industry," Spierings said.

Early this year Fonterra launched a pilot of its Anmum brand in southern China, which Spierings said was successful.

Chief executive Theo Spierings says if Fonterra wants to be globally relevant, it has to be part of the Chinese dairy industry. Picture / Greg Bowker

The co-operative said the partnership would help meet China's growing demand for infant formula and help advance its plans for Anmum, which would be distributed through Beingmate.

Fonterra will shortly start the process to issue a partial tender offer to gain up to a 20 per cent stake in Beingmate, which is a listed entity.

The deal involves Fonterra offering 18 yuan per Beingmate share - a 20 per cent premium to its last traded price - in a partial tender that will involve chairman Wang Zhentai selling down his stake to about 33 per cent.

The plan involves Fonterra and Beingmate setting up a joint venture to buy Fonterra's Darnum plant in Australia. The joint venture will pay Fonterra $50 million for the half share of Darnum.

At home, Fonterra plans to build a new drier at the Lichfield site in South Waikato capable of processing up to 4.4 million litres per day and similar in size to the world's largest drier at Darfield, in Canterbury, which produces up to 30 tonnes of powder an hour. Three plants will also be installed at Edendale in Southland.

Its latest investments will be funded by debt, it said.

The changing face of Fonterra
• Fonterra/Beingmate partnership to meet China's growing demand for infant formula.
• Partnership is intended to increase the volume and value of Fonterra's ingredients and branded products exported to China.
• Fonterra to buy up to 20 per cent stake in Beingmate for about $615 million.
• Fonterra/Beingmate to set up a joint venture to purchase Fonterra's Darnum plant in Australia.
• Deal involves distribution agreement to sell Fonterra's Anmum brand in China.
• Fonterra to spend $555 million on plant expansion in Waikato and Southland.