S&P gives thumbs-up to Fonterra’s consumer sale plan

S&P is backing Fonterra's plan to sell its consumer business.

S&P Global Ratings says Fonterra’s plan to sell its consumer business will help the co-op unlock capital to pursue organic growth.

Last week, Fonterra said it was looking at full or partial divestment options for some or all of its global consumer business, including well-known brands such as Anchor, and its integrated businesses Fonterra Oceania and Fonterra Sri Lanka.

Chairman Peter McBride said it was a significant move for the co-op, which would set it up to grow long-term value for farmer shareholders and unit holders.

“We have conducted a strategic review which has reinforced the role of our core business,” McBride said.

S&P said Fonterra’s decision to explore divestment options for its consumer business highlighted its focus on its core function of collecting, processing and selling New Zealand milk.

Any divestment could reduce the co-operative’s scale of operations and earnings diversity.

“We would expect the cooperative, however, to accompany any deterioration in the scope of its business with a recalibration of its capital structure that is consistent with the ‘A-’ rating,” S&P Melbourne-based analyst Sam Playfair said.

S&P said Fonterra has a robust balance sheet “and financial policy settings that enable it to consider divestment options and forgo sizeable earnings”.

The division contributes about 20 per cent of normalised group earnings.

“However, we would still expect a proportionate amount of proceeds received from a divestment to be applied to debt reduction to offset this deterioration,” Playfair said.

“Fonterra remains committed to an ‘A-’ rating and will pull levers at its disposal to ensure ratings stability, in our view.”

Fonterra noted that the shape of any divestment is still evolving.

“We believe the rating on Fonterra (A-/Stable/A-2) is underpinned by the group’s position in the global export of dairy products, and dominance in the purchase of raw milk in New Zealand,” Playfair said.

“Fonterra’s capital-intensive consumer division requires a higher level of operational expenditure and ongoing brand investment, compared with its ingredients and food services divisions.

“Therefore, we believe separation of the business may help reduce operational complexity, moderate capital expenditure requirements, and unlock capital to be redistributed internally to pursue organic growth options,” it said.

Fonterra has said it expects to continue to supply milk, after divestment, to the new owners should a sale go ahead.

Market reaction to the move has been positive.

- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.