Fonterra woos Australian dairy farmers with talks of unity

Related tags National foods Milk Fonterra

Fonterra's CEO, Andrew Ferrier, arrived in Victoria, Australia
yesterday as part of a last-ditch attempt to convince Australian
dairy farmers to back the dairy co-operative's bid for the
country's leading dairy company, National Foods - one week before
the expiration of its latest share offer, Tom Armitage

Ferrier warned that the imminent merger between Europe's Arla Foods and Campina, together with the extensive restructuring of the US groups Dean Foods and Suiza, would soon see a shift in the balance of power across the global dairy market, emphasising the need for a unified Australasian dairy industry.

Low dairy stocks across the US and Europe have recently helped to buoy global dairy product prices (butter, cheese and milk prices reached record highs last season at an average of US$425/mt) - something which Ferrier believes has left Australia and New Zealand "in the box set,"​ referring to the two countries' powerful joint position as the world's leading milk producing region.

"There is much to be gained from improving our global competitiveness and from working together,"​ he commented.

Ferrier's comments come only a week after Fonterra lifted its 2004-5 forecast payout to AUS$4.50 per kg of milk solids - a move widely interpreted as a sweetener to Australian milk producers, possibly in anticipation of a renewed share price offer for National Foods.

Fonterra already has a substantial vested interest in the Australian dairy market, controlling an estimated 16 per cent of Australia's milk processing market through its alliance with Australian dairy firms Bonlac and Peters & Brownes.

Since October last year the co-operative has been locked in a bidding war for National Foods, after its initial hostile offer of AUS$1.62 billion was trumped by an offer of AUS$1.78 billion from San Miguel, the Philippines-based drinks conglomerate.

Australian dairy farmers have so far rebuffed Fonterra's share offer, claiming that its AUS$1.62 billion (US$1.3 billion) bid undervalues the company.

Meanwhile, analysts have suggested that in order for Fonterra to clinch the National Foods acquisition, it must raise its offer closer to National Foods' current recommended valuation of AUS$6.11-AUS$6.65 per share.

Conversely, despite receiving the unanimous backing of National Foods' executive board earlier this month, San Miguel's bid has not received such an unequivocal level of support from Australian farmers - with many repeating calls that San Miguel's reputation as a drinks manufacturer does not tie in well with National Foods' core dairy activities.

Fonterra's 13,000 New Zealand-based member-farmers have also collectively expressed a reluctance to acquire National Foods - claiming that a major merger could have an adverse effect on the region's milk prices.

Similarly, Fonterra's intention to move away from commoditisation into the more lucrative area of branded, consumer dairy products (a market in which National Foods already has a strong foothold) has also attracted widespread criticism from members - a move which could potentially diminish their influence in determining dairy prices.

But regardless of which company wins the eventual bidding war, both San Miguel and Fonterra face a number of potentially problematic legislative issues.

San Miguel, for instance, requires clearance from Australia's Foreign Investment Review Board and also the Australian Competition and Consumer Commission and Fonterra has yet to secure the licensing rights from National Foods to manufacture French dairy company Sodima's Yoplait-branded yoghurts.

Related topics Markets Fonterra

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