Fonterra's plan to sell its consumer and associated businesses including brands such as Anchor and Mainland is a "sensible decision", with the assets perhaps fetching $3 billion and scope for "material capital returns" to farmer shareholders, analysts with investment services firm Forsyth Barr say.
Senior analyst Matt Montgomerie and associate analyst Benjamin Crozier say they are supportive of the proposed "significant divestment".
"The Consumer business has been a problem child," they say.
"A number of the brands (particularly in Asia) have been victims to numerous impairments, Australia performance has been mixed at best, and earnings/returns have been volatile (and lacklustre).
"Focussing on the core business, where it has delivered more success (particularly China Foodservice), is the right strategy."
The analysts say Fonterra's core strength is processing milk.
"Selling branded consumer products is not a core strength, as evidenced by its poor performance over a prolonged period. Ownership is best suited to experienced brand owners; we are glad [Fonterra] has now recognised this."
They say there is a "wide range of potential outcomes" from the sale.
"While earnings have been volatile historically, we suspect there could be meaningful cost synergies (particularly on sales and distribution) for a prospective buyer.
"We also think it is feasible that the businesses could be sold in multiple transactions to a range of buyers. All together, we foresee an aggregate sale price range of NZ$2.5 billion to NZ$3.5billion."
While the analysts don't forecast, as such, exactly how much Fonterra might return to shareholders from the sale, included in their examples of future earnings ratios is an example of a $2 a share return.
This is the dairy industry payout history.
Dairy prices
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15 Comments
https://www.nzherald.co.nz/lifestyle/how-much-did-groceries-cost-in-199…
Milk and cheese up 50 percent over 30 years. Many other products rose 200 percent from 1994 to 2024.
Efficient farmers getting less for their milk
That's largely because many of Fonterra's 'products' become ingredients in the brands that are selling the final products to the consumers.
Think products like 'milk power' that go into 'Up and Go" and hundreds of products like it. The milk power can come from anywhere ... but the 'brand' producing the final product that the consumer is buying still makes a healthy profit irrespective of where the milk power comes from. See the risk?
but the 'brand' producing the final product that the consumer is buying still makes a healthy profit irrespective of where the milk power comes from.
Not necessarily. Dairy shelf prices do not behave like commodity prices adjusting on a daily basis. And even if they did, that does not guarantee consistent profits and / or margins.
"Selling branded consumer products is not a core strength ..."
Then they should develop another 'core strength' and reap the rewards. This isn't that hard. It starts with getting the right people and then doing something NZ businesses aren't that good at: making a realistic plan and seeing it through. If they do this for one "branded consumer products" business, they can take that model, fine tune it, and roll it out to other units. Too much like hard work?
The other thing about a "branded consumer products" business is that they don't just sell a single supplier's products. The consumers know the all important "brand" and they usually don't care so much where the products originate. Thus these "branded consumer products" businesses have the ability to grow substantially bigger than the original supplier from which they came.
https://en.wikipedia.org/wiki/List_of_largest_dairy_companies
My point is that when you have a core strength, you build on it and grow it. Retreating is for 'also rans'.
What a surprise.
Investment bankers, who stand to gain millions if not tens of millions in fees from any sort of sale being supportive of Fonterra divesting its brands.
And yippy - Nestle is likely to be one of the winners.
The big get bigger and the rest (Fonterra) fade away in irrelevance.
To suggest Fonterra's milk processing is it's strength is laughable.
To further suggest, as this article does, that pursuing even more business in China could be good idea when our payout is already heavily affected by our over exposure to China's lack luster economic state is (lost for words)
I have experience in business to business models. There is only one winner. The one with the most power.
I agree - Fonterra have a business worth $2-3 billion give or take - it could be worth more (should be already) if they hired the smarts and built it but no lets take the money and run.
I also think that where they are proposing to retreat to is the very area of operation that is exposed to alternative proteins -so in future the marketers making consumer products will not need Fonterra
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