The view also reflected an increased confidence in Fonterra’s core Ingredients and Foodservice earnings and returns profile beyond Mainland Group (if divested), which they believed can at least support dividends of 30 cents a share.
Market expectations are for proceeds from the Mainland sale to be around $2.5 billion to $3b.
“We acknowledge there is upside if Fonterra demonstrates an ability to meet the midpoint or upper end of its return on invested capital target post-Mainland, but believe the market will be patient in recognising this,” Montgomerie and Crozier said.
“Mainland Group has faults but a refreshed mindset could turn things around. Consumer and Australia have been long-standing problem areas within Fonterra and account for the majority of Mainland Group earnings.”
Montgomerie and Crozier said the top end of the $2.5b–$3b range would likely be achieved via a trade sale.
They said the Mainland businesses appear to have lacked consistent management focus.
“Under new ownership, we see scope for: (1) cost efficiencies (supported by our benchmarking analysis to international peers), and (2) brand and asset rationalisation — both could lift margins and returns.”
Post a Mainland exit, Fonterra would be a better business, they said.
Buyers line up
Australian media reports say bids for Mainland have landed from private equity firms and strategic suitors.
The Australian’s DataRoom said bidders include France’s dairy giant Lactalis, advised by Rothschild, and the Australian-listed Bega, advised by Kidder Williams.
The paper said Swiss investment bank UBS could also be jointly advising ASX-listed Bega, which has a market cap of A$1.6b market value and which may raise equity to buy Mainland.
The Australian said Pacific Equity Partners had also submitted a bid.
Generators suffer
The power generators continued to suffer from a dry start to 2025.
Mercury NZ said its annual profit will be affected by dry weather in 2025.
The power generator and retailer said it had revised its earnings before interest, tax, depreciation, amortisation and financial instruments for the year down to $760 million from $820m, reflecting a decrease in full-year hydro generation.
While a downgrade was always going to be on the cards, Devon Funds head of retail Greg Smith said the size of it “surprised a bit”.
Meridian Energy, the country’s biggest power generator, said its third quarter inflows were at a record third quarter low across 92 years of historical inflows.
Total inflows were 48% of historical average over the quarter, 50% lower than the same period last year.
Electricity futures prices increased during the quarter.
Market holds
While the New Zealand sharemarket had taken a battering from volatility on world markets, Smith said it had held up reasonably well.
The impact on the two biggest players with exposure to the US - Fisher and Paykel Healthcare and Mainfreight - would not be “huge”, he said.
Smith noted that annual exports to the US totalled around $9b, 10% of which is $900m.
“It is still relatively benign and manageable.
“And there is that aspect that we will get some of those cheaper goods from China as they get diverted from other markets to here, which could help keep inflation down.”
A 10% tariff has been placed on New Zealand goods heading to the US, effective from April 2.
Jamie Gray is an Auckland-based journalist covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
