Fonterra sees its move to establish dairy farms in China as a strategic win.
The dairy co-op said today that it had agreed to sell its China farms for a total of $555 million to Inner Mongolia Natural Dairy Company, a subsidiary of China Youran Dairy Group.
Separately, Fonterra said it had agreed to sell its 85 per cent interest in its Hangu farm to Beijing Sanyuan Venture Capital Co for $42m.
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In Fonterra's accounts, the farms were subject to $203m in impairments in 2020 and $63m in 2020.
Post impairments, Fonterra had written down the holding value of its China farms to $480m.
Fonterra's foray into dairy farming in China began just over 10 years ago, when the country represented a small fraction of the $4 billion business that it is today.
"We always said that we needed to support the local Chinese dairy industry to make that happen," Hurrell said.
"Strategically it was a very important move and we are pleased from that perspective, but we did not start off with the intention of losing money," he said.
From the outset, Fonterra's dairy farms in China have struggled to turn a profit.
"They have not been as successful as we would have liked," Hurrell said.
"It's been a difficult process for us to set up farms in China but from a strategic perspective it was absolutely the right call," he said.
"We have done what we said we would do in supporting the local industry and getting those farms to an operational level that we are all happy with, including the local Chinese, and we are now in a position to pass the baton back to local ownership," he said.
"So from that perspective we are very happy and the $4 billion business that we have in China today is something that we are very proud of."
Fonterra has been selling assets to reduce debt over the last 18 months.
All that remains to be sold now is Fonterra's DPA investment in Brazil which it has said was performing strongly.
Covid-19 disruption of the process meant the sale was probably some months away, Hurrell said.
Forsyth Barr analyst Chelsea Leadbetter said the China farms sale was "on strategy" in terms of simplifying the business and reducing debt.
"Unfortunately it has not been the best experience in China," she said.
"We will continue to see them simplify the business and pay down debt, which is good for everyone in terms of its ability to perform going forward," she said.
Fonterra last month returned to annual profitability after two years of steep losses.
In announcing a $659m net profit, the company said it would restart dividends after a two-year hiatus.
Fonterra settled on a milk price for the season just north of $7.14 per kg - one of the highest on record - and kept its forecast for the current season within a $5.90-$6.90 range.
The previous year's $605m net loss was driven by $826m in writedowns on ill-fated acquisitions.
In the year just past, Fonterra has made inroads into its debt mountain, reducing its debt-to-ebitda ratio to 3.4 times from 4.4 times a year ago.
Hurrell wants to get Fonterra's debt down to three to 3.5 times ebitda this year and the ultimate goal is to get it down to between 2.5 and three times.
In terms of Fonterra's strategic "reset" launched a year ago, Hurrell said the co-op was getting close to achieving its goal.
For the current year, Fonterra has forecast an earnings per share range of 20c-35c.
The co-op's NZX listed units last traded at $4.02, up 2c from Friday's close.
Fonterra's slow, painful Beingmate exit continues
Meanwhile, Fonterra has shed more than 10 per cent of its stake in Chinese company Beingmate as the slow, painful process of selling out of the costly investment continues.
The Kiwi dairy co-operative now holds 7.82 per cent of Beingmate following its latest reduction, according to Shenzhen Stock Exchange data.
Fonterra has been selling down in 1 per cent chunks through "centralised bidding transactions" and block trades.
Under Shenzhen Stock Exchange rules it is only possible to sell up to 1 per cent every 90 days directly on the exchange, or sell up to 2 per cent in a single block every 90 days.
Trades greater than 5 per cent can be made to an individual party in an off-market transaction.
Fonterra recently sold 10.225 million shares between September 22 and September 28 when the Beingmate share price hovered between 6.8 yuan and 7.4 yuan.
Fonterra paid 18 yuan per share for its Beingmate shares for a total outlay of NZ$755 million as part of a joint venture partnership. But when heavy financial losses decimated Beingmate's value, Fonterra was forced to write down the carrying value to just $204m before making the decision to exit last year.
Beingmate shares last traded at 7.07 yuan, although the stock did reach a high of 9.18 yuan on August 25.
When Fonterra invested in Beingmate in 2015 it said the deal would give access to the lucrative Chinese market for its infant formula and other products.
Beingmate originally had sole rights to distribute Fonterra's popular Anmum brand in China but that ended as the two companies fell out over strategy and governance issues.
In August Beingmate released its interim result showing operating income in the first half of 2020 was 1.487 billion yuan, a year-on-year increase of 14.78 per cent.
Net profit was 48.28 million yuan, an increase of 140 per cent.