Merger expands Fonterra's home front

Fonterra's goal of developing a stronger transtasman "home" market has taken a step forward through a deal between the dairy giant and Australia's Bonlac Foods.

The two companies are merging their consumer products businesses into a new entity, Australasian Food Holdings (AFH).

It will be the largest dairy food company in Australasia.

Fonterra chief executive Craig Norgate said the new company would save $10 million to $20 million a year by reorganising Fonterra and Bonlac brands, which include Mainland, Tip Top icecream, Meadowfresh, Tararua, Galaxy, Ferndale, Huttons, Kiwi, Bega and Cadbury Ice Cream.

AFH joins Australian businesses Bonland Dairies and Peters & Brownes with New Zealand businesses Mainland and Tip Top.

It will employ about 4000 people and have annual sales of more than $2.3 billion.

Fonterra, which bought 25 per cent of Melbourne-based Bonlac last year, estimates the merger will cost about $200 million, although the deal involves the exchange of shareholdings rather than cash.

Norgate said AFH would create a strong platform for growth in Australasia.

"We see the interests of farmers on both sides of the Tasman as being aligned both to that domestic market and, importantly, the international market," Norgate said.

"For that reason, consolidating our assets in Australia has been a high priority for us."

The new company would provide a "number of options" which could include the sale of Fonterra's 18 per cent stake in Australian dairy major National Foods.

"We are happy to let that speculation continue," Norgate said.

"We have firm views on various options we have got, and in due course they will be revealed."

He would not be drawn on the possibility that the new company might be floated.

"We see it as an integral part of the wider business, but I wouldn't exclude different forms of capital in the future."

Fonterra will own 75 per cent of AFH. Bonlac will have 11 per cent and two minor shareholders, Aorangi Laboratories and Calpa, will each have 7 per cent.

The companies have yet to decide where AFH's head office will be.

AFH will absorb Bonland Dairies, a 50-50 joint venture struck between Fonterra and Bonlac last September.

While the new company will have strategic benefits, Fonterra farmer shareholders are unlikely to gain much financially from the deal.

"If you take the synergies we talked about, of $10 million to $20 million, and take our 75 per cent share of that, the potential there is of the order of a cent in payout in New Zealand," Norgate said.

Benefits for Bonlac would be a strengthening of its balance sheet and stronger positioning, Bonlac chairman Noel Campbell said.

Fonterra has been positioning itself across the Tasman for some time.

In May, Norgate told a dairy conference that the company now considered Australia part of its home market.

"A strong dairy industry needs a strong home market," he said then.

"The Dairy Board didn't have one, and New Zealand alone doesn't provide the base needed."

Over the past year Fonterra has notched up a number of other strategic partnerships, including a 50/50 alliance with Nestle to maximise opportunities in Latin and North America.

Other deals include a skim milk powder export deal in the US, and a partnership with Dairy Farmers of America to manufacture milk protein concentrates in the US.

Apart from a capital notes issue, Fonterra is owned by more than 1400 farmer shareholders.

Bonlac is 75 per cent owned by its 2500 farmer shareholders.

The AFH deal does not require their approval.

- STAFF REPORTER, NZPA