Dairy co-operative Fonterra is pressing ahead with plans for a multi-billion dollar sale of its consumer brands.
In an update on the plans, first foreshadowed last year, Fonterra chief executive Miles Hurrell confirmed the co-op was still pursuing either a trade sale or an initial public offering (IPO) for the consumer businesses, which include household name brands such as Anchor and Mainland as well as the Fonterra Oceania and Fonterra Sri Lanka operations.
If the for-sale assets are to be listed on the stock exchange it will be under the name of Mainland Group.
"Our intention is to thoroughly test the terms and value of both a trade sale and IPO before selecting an option to put to farmer shareholders for a vote," Hurrell said.
As part of the trade sale process, over the coming weeks Fonterra will be engaging with potential buyers of the consumer and associated business.
"Alongside this, as part of preparing for a potential IPO, Fonterra has named key management team members and chosen a corporate brand for the entity if it is to be publicly listed."
Fonterra had chosen Mainland Group as the corporate brand as the Mainland brand "has strong New Zealand dairy heritage and is also well known by consumers in New Zealand, Australia and across many of our global markets", Hurrell said.
It was estimated last year that Fonterra shareholders might get around $3 billion - $2 per share - from a sale of the consumer businesses.
Hurrell said Fonterra continues to target "a significant capital return" to be made to farmer shareholders and unit holders following the divestment.
The co-op initially (last May) estimated the sales process could be completed within 12-18 months. On that timeframe a sale could be completed somewhere between May 2025 and November 2025.
In the update issued on Wednesday, Hurrell named René Dedoncker as chief executive-elect for Mainland Group.
He is currently Fonterra’s Managing Director Global Markets Consumer and Foodservice, leading the businesses in scope for divestment. He joined Fonterra in 2005.
Paul Victor was named as chief financial officer-elect for Mainland Group. He has joined Fonterra from ASX-listed Incitec Pivot Limited.
"René and Paul are very capable leaders with the experience to take these businesses forward into their next phase. Both will lead roadshow meetings with potential investor groups, commencing in March," Hurrell said.
"We recognise the ongoing interest in the divestment process and will provide further updates as we make progress."
10 Comments
It will be interesting to see if under a new structure they are able to differentiate value add from sustainability initiatives, and get better market prices accordingly. The bulk ingredients market is more difficult to differentiate within than consumer brands.
They can always re-enter the consumer with a new brand essentially re-inventing themselves.
The IPO has a degree of attraction depending on the level of Fonterra shareholding, which is hope would be low.
The IPO would give all those who decry Fonterra lack of focus on so called value add, to put their money where their mouths have been.
I don't understand this, and never have. How can Fonterra get the best value for its shareholders by selling milk powder overseas?
You're probably thinking of it in to simpler terms. Fonterra doesn't just sell one form of milk powder or any product for that matter. Part of Fonterra's success is the ability to sell a product within a very narrow spec in exactly the volumes wanted, delivered exactly on time. While there can be further processing and marketing, it all adds cost with no guarantee of return. And consumer marketing is not a strength. Business marketing on the other hand is along with logistics.
Good stuff in a nutshell, right there. High end product is valuable in the best of times, but its speciality position in the market, leads unavoidably to increased cost and associated risk, and if the best of times should become the worst of times then it is likely stranded as consumers return to the basic, staple food as necessary for the family table. In other words eat cheddar not brie. It is by no means an easy balance to achieve because there are many uncontrollables and unforseeables from production line to market. The question then is growth by volume as opposed to added value.While trading the commodity end is safer and efficient in terms of economy of scale given the bigger base market, sooner or later it will inevitably simply plateau, no more growth in other words and therefore no increasing revenue. That is the playing field those in charge are basing their decisions on.
While supplying commodity items is certainly logistically a lot simpler, consumer goods offer the prospect of some much heftier margins.
Rather than simply selling off the assets and well-known brands, wouldn't spinning off a subsidiary company, with a different set up to innovate and develop new products and strategies for new revenue streams, be a better way to go?
To not explore the high ground of potential profitability looks like an admission that: "oh, it's all too hard!" - which gives the appearance the organisation isn't capable of change, and is not reassuring for stakeholders.
Only a very short look back in Fonterra history demonstrates Fonterra is not inherently averse to change - Theo Spering debacle.
You tend not to grasp that the major stakeholders are the farmer producers of the milk, who own Fonterra. Each farmer is an independent, autonomous, business. Getting optimum revenue from their milk production is their raison d'etre. From a farm business perspective, avoiding high risk is a sound financial strategy. The farmer owned cooperative gives them a far greater degree of market power than for example, farmer suppliers to Synlait or other non-cooperative milk processors.
As you say, farmer co-op stakeholders should be quite focussed on optimised returns, and risk to the existing co-op would be managed by having a financially separate value-add company set up, with a different culture that fosters new product development, but takes its raw materials for value-add from the co-op. There would be nothing to stop the co-op members being stakeholders in both enterprises.
Producing a more limited range of commodity products actually increases risks like: product substitution, supply chain disruption, technological competition, tariff warfare, and events like disease outbreaks. Also: selling to a commercial market is lower margin becasue the buyers have a firm grasp on actual costs and know exactly how much they are prepared to pay before their own profitability takes too much of a hit.
I don't see how the concept of farms as independent business suppliers makes a difference. It just feels like walking away, leaving money on the table, becasue of a lack of imagination.
But consumproducts has been a division within Fonterra for a long time and never delivered the benefits back to the stakeholders aka farmers that you are suggesting are being walked away from.
Why is individual farm business important? Because it is their milk that is being collected, processed and sold. In any other business decisions are made to retain or drop product lines depending on their contribution to the business. No different from what farmers are doing through their collective voice as a farmer cooperative. However there us one big difference about farm businesses - they are the first link in the value chain, they cannot pass cost down chain as other entities above them can. There is truth in the clicked definition of a farmer: buys retail, sells wholesale and pays the cartage both ways. The cooperative allows the farmers to be price setters to a far greater degree than if each, individually went to market with their buckets of milk (which is, essentially what the meat, wool and apple industries do, and receive the least price to secure sustainable supply in the process). Unlike synlait or other non-cooperative milk producers, Fonterra pays the highest sustainable price for the milk it processes.
You might say that Synlait is paying a good price to farmers and so the cooperative doesn't make a difference. That is a patently wrong conclusion. Because Fonterra, in NZ benchmarks raw milk value to the farmer supplier. To attract and retain raw milk supply, non-cooperative processors have to pay a reasonably similar price. And that hurts them. Synlait shares are at $0.90 today and each if those shares represents an owner with some notional voting right influence within Synlait (acknowledged there is complexity around this). Yet Fonterra Shareholder Fund is trading at $5.12 and there is no voting right attached to those shares.
One last key point is that the competitive market for NZ milk (and most other ag export sectors) does not lie within NZ's borders, it is in the global market where individual corporates may have annual turnover in multiples of NZ total annual GDP.
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