Lactalis’ proposed acquisition of Fonterra’s consumer and integrated businesses is stirring up New Zealand’s political scene.
The country’s foreign affairs minister has cast doubt over the future supply relationship of the two dairy majors, speculating that the French multi-national has ‘every incentive’ to cut ties with Fonterra’s dairy farmers.
Voting to accept or reject Lactalis’ NZ$4.22 billion proposal for Mainland Group is now underway among Fonterra shareholders, with decision due on October 30, 2025. The vote is a key step towards rubber-stamping the deal, which is expected to settle in Q1 2026.
For Fonterra, the divestment would enable a $2.00 per share tax-free capital return, totalling around NZ$3.2 billion for shareholders. Net proceeds after costs are estimated at NZ$4.11 billion, with the remaining funds to be invested in the co-op’s Ingredients and Foodservice businesses.
For Lactalis, the acquisition will unlock synergies with its existing operations in the region; broaden its portfolio of consumer brands, and strengthen its position in APAC, a large target growth market for the company.
Lactalis’ offer represents a significant premium when adjusted for maintainable earnings and is deemed to be of ‘good value for shareholders’ by independent corporate advisors Northington Partners, who advised the co-op on the deal’s merits.
It also satisfies Fonterra’s desire to cleanly exit the consumer market and emerged as the highest-value option from a competitive sales process that pitted trade buyers versus investors.
The deal includes long-term supply agreements to support continued demand for New Zealand milk and dairy ingredients. It’s one of these supply agreements that is causing a political ruckus Down Under.
‘Why would we believe Lactalis…?’
New Zealand First party leader and foreign affairs minister Winston Peters has cast doubt on Lactalis’ intentions to keep its word over sourcing milk from New Zealand farmers.
In an open letter to Fonterra’s farmer shareholders, he pondered Lactalis’ commercial incentive to stay part of the Global Supply Agreement – a three-year, automatically renewing contract for the supply of dairy ingredients and finished products between Lactalis and Fonterra.
Below we quote key points from his open letter, published in full on the political party’s website.
“Why would we expect Lactalis to offer any long-term security to New Zealand farmers? Every incentive is on Lactalis to do the opposite,” Peters wrote. “The most direct commercial lever [Lactalis] will have is to terminate their supply deal, and dilute New Zealand milk with lower quality, cheaper milk and vegetable fat.”
“Why would we believe Lactalis would want to secure New Zealand milk for more than three years? If they do, why has Lactalis not offered a longer supply agreement? If they meant it, it would be in the deal.”
Singling out one of Fonterra’s biggest consumer brands, Anchor, Peters said that ‘for $4 billion, they are giving it away’ and calls the ‘billions’ required to scale up Fonterra’s consumer brands ‘nonsense’.
Lactalis and Fonterra’s supply agreements
The two dairies are bound by two rolling long-term agreements: a 10-year Raw Milk Supply Agreement and a three-year Global Supply Agreement.
Raw Milk Supply Agreement (RMSA)
Term: 10 years, with automatic renewal.
Scope: Supply of raw milk from Fonterra.
Volume: Up to 350 million liters annually, with an option for additional 200 million liters at a higher premium.
Pricing: Based on Fonterra’s farmgate milk price, with extra premiums applicable for winter milk (June-July).
Termination: With 3 years’ notice after year 7.
Global Supply Agreement (GSA)
Term: 3 years, with automatic renewal.
Scope: Two-way supply of ingredients and finished products between Fonterra and Lactalis.
Volume: None disclosed.
Pricing: Fixed methodology for the first three years, with a pricing review every three years. Prices include a commercial margin.
Termination: With 3 years’ notice after year 3.
Why would Lactalis cut off Fonterra’s milk suppliers?
So are New Zealand’s dairy farmers – most of whom supply Fonterra – at risk of being cut loose by global dairy giant Lactalis if the deal goes through?
It makes little commercial sense for Lactalis to terminate either the long-term RMSA or the short-term GSA – though there are levers that Lactalis may be able to pull to secure better terms at renewal.
The RMSA is designed to provide stability to Fonterra’s farmers and has a robust minimum term. Even beyond that initial term, the possibility that Lactalis would choose to terminate the agreement is relatively low, given the strategic and operational benefits tied to sourcing locally-produced milk and Fonterra’s longstanding role as the biggest dairy supplier in the country.
New Zealand has a robust dairy supply system and its pasture-based model yields milk high in protein and fat content, making it highly attractive for use in premium dairy and nutrition products and ingredients. New Zealand milk is a major USP in Fonterra’s consumer products and would be key to preserving the brands’ value in global markets. This is also why it makes little commercial sense for Lactalis to willingly lower the quality of Fonterra’s farmer-supplied milk.
Why would Lactalis stick with Fonterra and not opt for another processor in time? The answer here is volumes.
Of course, Lactalis’ own milk supply globally is significantly larger than Fonterra’s: but in APAC, Fonterra’s New Zealand milk pool alone is nearly seven times larger than Lactalis’ combined APAC & EMEA supply (20.7 billion litres vs 3 billion litres).
All this makes a supply relationship between the two dairies mutually beneficial.
As for the three-year rolling GSA, that agreement is designed to ensure stability in both supply and pricing that’s commercially fair.
While the milk volume traded between Fonterra and Lactalis under the GSA is undisclosed, it’s likely to be substantial now and in the future, particularly given that Lactalis will become one of Fonterra’s biggest customers if the deal goes ahead.
The GSA’s non-exclusivity means that Lactalis could gradually reduce volumes, even without full termination. But Northington Partners’ independent assessment found that this is unlikely to happen, because the owner of Mainland is likely to continue to purchase similar volumes of ingredients or finished products as currently supplied by Fonterra.
As for why the agreement’s term is set at three years only, this is done to ensure pricing can be revised and aligned with market conditions. Under the GSA, prices include an arm’s-length commercial margin consistent with Fonterra’s relationships with other large customers: meaning it’s designed to be mutually beneficial and doesn’t differ from other major contracts Fonterra has.
How will Fonterra’s farmers vote?
For the deal to be voted through, more than 50% of the votes cast need to be in favor of the proposal. Voting can be done in person at the Special Meeting on October 30; online, or by proxy. Farmers form the vast majority of Fonterra’s shareholders, but there are also unit holders who are equally eligible to vote.
In September, 96% of Fonterra’s Co-op Councillors, who are elected to represent Fonterra’s farmers, supported the proposal. John Stevenson, Council Chair, reported that a key area of discussion was the expected performance of Fonterra after the divestment. Earnings per share are set to drop following the divestment, but co-operative CEO Miles Hurrell has indicated these will recover to current earning levels (71 cents per share) within three years.
“One Councillor voted against the proposal,” Stevenson told this publication. “That person’s concerns centred around whether the proposed divestment was in the best interests of the future generations of Fonterra farmers. Farmer feedback specific to their geographic area helped to inform their decision.”
On whether the opportunities unlocked by the divestments outweigh the risks, Stevenson pointed us towards Northington’s assessment. “Council commissioned its independent analyst Northington Partners to provide an independent assessment of the merits of the proposal. Their report states: ‘Considering both the positive and negative impacts of the divestment, we believe that the sale of Mainland will make Fonterra a better business’.”
The advisors also note that the divestment is ‘in the best interests of Fonterra’s [s]hareholders’ given that it would remove the low-return consumer business and allow the co-op to focus on its high-yield B2B channels, enabling it to ‘strengthen earnings resilience and grow where it has the greatest competitive edge’.
Fonterra has consistently moved away from consumer goods and towards B2B in the past decade – and this shift has recently turned into a fully-fledged business strategy, underpinned by the sale of Mainland Group and a growing focus on the co-op’s more profitable Ingredients and Foodservice businesses. Now, Lactalis’ bid offers the co-op a clean exit from underperforming segments; an ongoing supply relationship with a major customer in APAC, and sound financial terms that would enable re-investment into its B2B arms.
Fonterra has already announced plans to pool resource into its existing protein portfolio and improving its butter and cream cheese capacity. CEO Miles Hurrell said the co-op wants to be ‘the source of the world’s most valued dairy’, adding: “Our strategy is designed to grow end-to-end value for farmers by focusing on being a B2B dairy nutrition provider.”
Will shareholders vote the deal through? That looks likely, but the hesitation in some circles indicates that Fonterra’s leadership has more work to do to convince suppliers how milk would be re-routed if Lactalis does choose to reduce volumes over times.
