Merger seals the dairy deal of a lifetime

Two and a half years ago, the boss of a giant Swiss company flew to New Zealand to see what we were doing with our cows.

He liked what he saw.

Before stepping aboard his jet home, Nestle chief executive Peter Brabeck-Letmathe sat down with one of this country's most charismatic industry leaders.

Few could have predicted what his meeting with former New Zealand Dairy Board chief executive Warren Larsen would bring.

Last week they found out.

After two years of behind-the-scenes negotiations spanning the globe, newly created local dairy giant Fonterra revealed a plan to join Nestle to penetrate previously unassailable North and South American dairy markets.

It's a big deal - New Zealand's largest commercial deal. It is estimated that the new joint venture will have almost $2 billion of sales.

As long as due diligence and regulatory approval go to plan, Fonterra - our largest company - will work with the world's largest food company, Nestle, to get into the world's fastest-growing dairy markets.

For years New Zealand's dairy companies have tried to gain entry to the lucrative Americas. Hurdles such as trade tariffs and quotas have been in their way.

Now, Fonterra's chiefs say, the partnership with Nestle will let New Zealand into those markets. Their plan is to use largely American milk to manufacture products using local methods.

Overseas experts have hailed it as a coming of age for our dairy industry.

But what does it mean?

For the 14,000 local farmer shareholders in Fonterra, it will probably mean bigger payouts each year.

Advocates of the deal also say it will put New Zealand's industry on to a bigger stage, because our local brands will be picked up by American supermarket shoppers.

In the sights of the joint venture is a region that holds 13 per cent of the world's population.

The dairy market across North and South America is estimated to be worth $US94 billion ($217.8 billion).

Fonterra sprouted from the high-profile merger of New Zealand's two big dairy companies in June.



The ambitious dairy co-operative has set itself difficult growth targets, and is trying to take swift steps towards achieving them.

Warren Larsen, the man many claim is responsible for the Nestle deal, said it was good to finally see the project through.

"A big chunk of my life was put into that," said Mr Larsen, who left the Dairy Board three months ago.

"Today felt really strange. I'm not in the thick of it anymore. It was a personal project of mine for a long time."

Reflecting on that first meeting with Nestle's boss 2 1/2 years ago, Mr Larsen said: "We just got on really well. I'd known several of his team for years."

Nestle was one of the Dairy Board's biggest customers. But the Swiss-based food giant was also one of our industry's biggest competitors. Getting a balance in the deal was crucial.

Mr Larsen put a proposition to Nestle 2 1/2 years ago that it should buy New Zealand's whole milk powder. At the same time he arranged a visit for Mr Brabeck-Letmathe.

"After a number of conversations they raised with us the concept of doing something together in Latin America. We then spent a year and a half working on it. We wanted to seal it before Christmas last year, but we couldn't."

The deal could not be finalised because Nestle wanted the signatures of both New Zealand's big dairy companies - Kiwi Dairies and the NZ Dairy Group. Only one would sign. Mr Larsen won't say which one refused.

He will say that getting the two to merge this year was a crucial step to sealing the Nestle deal.





On June 18, farmers voted for the merger, and the Nestle deal moved ahead rapidly. So, too, did deals to buy two of Mexico's largest dairy companies, and an agreement to sell the bulk of American skim milk powder.

Fonterra chief executive Craig Norgate says it is important to remember that the work is not yet over - "We still have to do things right."



Mr Brabeck-Letmathe says Nestle will benefit from Fonterra's world-renowned expertise in livestock and milk technologies and the development of dairy farming.

Both companies already contract farmers in the United States to supply them with milk. But Mr Brabeck-Letmathe says neither company is strong enough in the region.