Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The agreement follows another recent downgrade of the value of Fonterra’s operations in China.
Inner Mongolia Natural Dairy Co., Ltd, a subsidiary of China Youran Dairy Group Limited (Youran), has agreed to purchase Fonterra’s two farming-hubs in Ying and Yutian for $513 million (RMB ¥2.31 billion).
Separately, Fonterra has agreed to sell its 85% interest in its Hangu farm to Beijing Sanyuan Venture Capital Co., Ltd. (Sanyuan), for $42 million (RMB ¥190 million). Sanyuan has a 15% minority shareholding in the farm and exercised their right of first refusal to purchase Fonterra’s interest.
Fonterra chief executive Miles Hurrell says the co-op has demonstrated its commitment to the development of the Chinese dairy industry through its farms.
“We’ve worked closely with local players, sharing our expertise in farming techniques and animal husbandry, and contributed to the growth of the industry.”
Hurrell says the sale of the farms will allow the co-op to prioritise the areas of its business where it has competitive advantages.
“For the last 18 months, we have been reviewing every part of the business to ensure our assets and investments meet the needs of the co-op today. Selling the farms is in line with our decision to focus on our New Zealand farmers’ milk.
“China remains one of Fonterra’s most important strategic markets, receiving around a quarter of our production. Selling the farms will allow us to focus even more on strengthening our foodservice, consumer brands and ingredients businesses in China.
“We will do this by bringing the goodness of New Zealand milk to Chinese customers in innovative ways and continuing to partner with local Chinese companies to do so. Our investment in R&D and application centres in China will support this direction,” says Hurrell.
Completion of the sale, which is subject to anti-trust clearance and other regulatory approvals in China, is expected to occur within this financial year.
Fonterra expects to use the cash proceeds from the two transactions to pay down debt, as part of its previously announced overall debt reduction programme.
