Fonterra's Chile shares buy removes a troublesome shareholder

Fonterra head office in Fanshawe St, Auckland. Photo / Michael Craig

Fonterra has dismissed any suggestion its $29.3 million spend in Chile is less about "streamlining" its operations there and more about getting rid of a shareholder that complained about it to South American authorities.

The dairy cooperative this week said it had purchased a 13.6 per cent shareholding in its subsidiary Prolesur held by the charity Fundacion Isabel Aninat, which earlier this year complained to Chile's prosecution service about commercial dealings between Prolesur and another Fonterra Chile subsidiary, Soprole.

In response to Herald questions, a Fonterra spokeswoman said "the Chilean Criminal Court has declared there was insufficient evidence to support a case and the matter is now formally closed".

The purchase takes Fonterra's shareholding in Prolesur, a milk processor in southern Chile that sells mostly to Soprole, from 86.2 per cent to 99.9 per cent.

Fonterra's announcement said the move was to "streamline" its Chile operations and better integrate the two businesses.

Asked if the move was to shut down a troublesome shareholder, the spokeswoman said in a statement better integration of Prolesur and Soprole would generate operating efficiencies across the supply chain.

"For example, better co-ordination of the collection and processing of milk, alignment of manufacturing and supply chain logistics of the two companies, and removal of any duplication of functions."

Soprole is a Fonterra ingredients business in the north of Chile.

The Chile businesses have been under review as part of a new business strategy for Fonterra, which declared a $605m loss for the 2019 financial year on the back of more than $800m of asset writedowns.

In May, when the Herald questioned Fonterra about Fundacion's complaint, the company said it was at an "informal investigation" stage by an appointed prosecutor.

Fonterra said the complaint related to a commercial disagreement between Fonterra-appointed directors and minority Fundacion directors on the Prolesur board, concerning terms of sale for cheese between Prolesur and Soprole.

No charges had been brought against Fonterra-appointed directors.

Fonterra said the remaining 0.1 per cent of Prolesur's shares are held by minority shareholders, which it would offer to buy at the same price per share being paid to Fundacion for its shareholding.

The Chilean dairy market is controlled by four companies, Soprole, Nestle, Loncoleche and Colun, the latter a fast-growing farmer co-operative.

Prolesur was established in 1990 when Soprole, Fonterra's oldest offshore investment, was restructured.

Fonterra and its legacy companies have controlled Soprole for more than 20 years but New Zealand's connection with the consumer goods producer goes back to 1986, when the then Dairy Board acquired more than 50 per cent of Soprole's shares. (The Dairy Board was rolled into the 2001 New Zealand industry merger that created Fonterra.)

Announcing the share buy this week, Fonterra said both Prolesur and Soprole were strong businesses but their recent performance had been impacted by challenging market conditions.