Fonterra chairman Peter McBride has strongly pushed the case with farmer shareholders for the co-operative to sell its global consumer business, including household-name brands such as Anchor and Mainland.
He told the annual meeting in New Plymouth on Thursday that as a farmer-owned co-operative and the associated cost of capital that comes with that model, Fonterra "is not the natural owner of a consumer business".
"Having reached that conclusion, our focus from here is on running a process that maximises value in a way that is in the best long-term interests of farmer shareholders," he said.
"The evolved Fonterra that remains will be a simplified business focused on our comparative advantages. It will be lower risk, be less capital intensive, and achieve an increased return on capital overall."
Fonterra first signalled in May this year that it was looking at selling the consumer businesses, including the Fonterra Oceania and Fonterra Sri Lanka businesses. And earlier this week it confirmed it was going ahead with plans for a sale, employing a dual track process that will examine the best potential return through either a trade sale or an initial public offering (IPO) followed by a stock market listing. "Meaningful buyer interest" has already been received.
Corporate advisers Northington Partners in an independent review of Fonterra's annual performance conducted for Fonterra shareholders and unit holders estimated that a successful sale of the consumer businesses could produce a cash payout of around $3 billion, or about $2 per share.
McBride told the farmer shareholders that when considering the co-op's strategy, "we need to challenge ourselves to look beyond the back fence, and past the here and now".
"The world is changing. We are moving out of an era of trade liberalisation and co-operation and into a world that is more expensive, competitive and volatile. Expectations are evolving and New Zealand milk is becoming scarce."
McBride said the cost of capital has increased, and many industries – "including agriculture and our bankers" – face higher capital requirements.
"In this new global context, Fonterra also faces increasing competition for both milk and capital here at home.
"We add value through the milk price - delivering a return on the $50 billion invested in on-farm capital. And by generating a return on the $12 billion worth of capital you have invested in the co-op.
"This last piece is central to the conversation on our strategy and the divestment of our consumer business.
"Right now, we estimate the weighted average cost of capital for a dairy farmer is somewhere around 10%.
"Consumer businesses are inherently more capital intensive and riskier businesses to operate - you’ve seen that play out over time in our own operation.
"Overlay that with the potentially higher geographic risk in the markets where our consumer businesses operate, and a respectable return on capital for the consumer business should be something north of 15%.
"Our Consumer business had one of its better years in 2024, but despite that, its return on capital was just 6.8%, up from 3.9% in 2023 and 0.2% in 2022.
"We cannot justify investing your money into a business that generates returns lower than your opportunity cost of capital, whilst at the same time exposing you to more risk.
"We are better off returning that capital to you, reinvesting it into the parts of our business where we have a comparative advantage, or a mixture of both," McBride said.
This is the dairy industry payout history.
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12 Comments
It is not necessary to specifically have a NZ presence based in a market. It is more important that the features and requirements of each market are understood and attended effectively and for that, it is essential to have the relative local knowledge on board. Today, abilities to communicate face to face electronically every hour every day provide instant liaison, agreement, direction and troubleshooting in need. On top of that branding is a double edged sword. The further it is taken, the further the cost and risk and too often the downside of that can outprice the upside. Fonterra, and before that the Dairy Board, have been around a very long time. At present it appears past misadventures have been addressed and rectified and the decision being promoted here will hardly have been taken without thought to that history and the way forward in light of it. Results always speak for themselves.
McBride using 10% cost of capital just using numbers to justify what the board are doing.
Realistically farmers would work on 3-4% on their equity long term and 7-8% for any borrowings.
I am not opposed, just waiting to be convinced with real numbers.
Once sold will be lost to farmers forever.
Doesn't divesting consumer brands move Fronterra further down the chain of commodity supply, rather than a potentially high-value-add business?
It looks like an admission that they can't build and manage brands - and might just be an even clearer signal that new management is required.
"New Zealand milk is becoming scarce."
Probably the most important statement.
Maybe, just maybe it points to a shift in power with the first time in centuries (?) the power is shifting back to the producer from the middleman/ manufacturer? Yeah nah.
It is important though as farms disappear in many areas and new dairy farms are almost impossible to consent.
The explanation works for now, but will it work 10-15 years from now. If China and Russia (with global warming expanding their farming area) build up their herds and will this decision make NZ a price taker in a over supplied market. I don't know, but if I was a dairy farmer I would like to know the answer from them.
We cannot justify investing your money into a business that generates returns lower than your opportunity cost of capital, whilst at the same time exposing you to more risk
What is the opportunity cost of a farm without debt and no need for capital? At present I'd say 4% or 5% and likely less as interest rates fall. It just seems almost every decision is being skewed by debt holders that chose to bid up land prices to pay banks more interest on ever larger loans.
Is it more risk or is it different risk? If it's a different risk, then it would be a diversification so potentially less risk even though it's less profitable at present.
Once they sell these legacy brands, I hope the future holds a simpler 'fonterra' branded product range to fly the flag as it were.
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