The fate of one of the biggest dairy deals will be decided this week.
At a Special Meeting on October 30, Fonterra’s shareholders will vote on whether Lactalis’ bid to acquire Fonterra’s consumer and associated businesses should go through. If more than 50% of voting shareholders – most of whom are supplying dairy farmers – approve the deal, it is expected to close in Q1 2026.
Divesting Mainland Group – the spin-off in which the for-sale assets were combined this year – paves the way for Fonterra to complete a strategic pivot into B2B and focus on its high-performing Ingredients and Foodservice arms. As for Lactalis, the acquisition would bolster its consumer branded portfolio and strengthen its position across manufacturing, foodservice and ingredients in the high-growth APAC region.
So what are the arguments for and against that Fonterra shareholders will be mulling over?
Why the deal should be approved
Northington Partners, the corporate advisors hired by Fonterra to independently review the deal, think Lactalis’ bid represents ‘good value’ for co-op shareholders. We sum up the five reasons why the proposal is attractive – and why it may be giving some some shareholders a pause.
Sale price
Lactalis’ offer of NZ$4.22bn is financially sound and was the highest bid to emerge from a competitive sales process. The proposed transaction would net Fonterra more than NZ$4bn regardless of settlement costs, with shareholders down to receive NZ$2.00 per share, or NZ$3.2bn in total tax-free cash return.
The proposal also translates to EV/EBITDA of 10.2x and EV/EBIT of 13.7x, in line with or better than comparable transactions. In fact, because Mainland Group’s recent strong performance on the market is unlikely to be sustainable (more on that later), Lactalis may be paying a premium to acquire the businesses relative to that.
Crucially, a 100% sale to one counterparty represents the cleanest exit compared to separate transactions for different components of Mainland. “Splitting the business would give rise to greater complexity in relation to the on-going operational agreements that would need to be put in place,” Northington states in their report.
Selling parts of Mainland would have likely been on the cards if Fonterra had opted for an IPO – and with an IPO, achieving a decent price ‘would have been difficult’, according to Northington Partners. “Potential investors would have focused on risks associated with earnings volatility in Australia and the Bega dispute, and it is highly likely that Fonterra would have been required to maintain a significant shareholding in the business.”
Mainland’s poor historical returns
Mainland makes up about a quarter of Fonterra’s total pro-forma capital employed, but has historically generated much lower returns than the co-op’s core businesses.
In fact, if that amount of investment had been pooled into Ingredients or Foodservice instead, Fonterra’s EBIT could have been around NZ$200m and NZ$110m higher in FY24 and FY 25, respectively.
Over the last three years, the average return for Fonterra's consumer channel was lower than 5%: compared to >10% achieved by Ingredients and Foodservice. Source: Northington Partners
Australia in particular has been ‘a perennial underperformer’ and has been previously considered for divestment by Fonterra.
And even though Mainland performed very well in FY25 (>30% increase in EBIT), this was mostly down to a favourable milk price in Australia benefitting its Ingredients channel and unlikely to be sustained year after year.
Ongoing milk supply agreements
The deal includes long-term supply and distribution agreements with Lactalis. The French multi-national is set to become one of Fonterra’s biggest commercial clients, being tied to a 10-year and a 3-year rolling milk supply agreements as well as a distribution deal where both parties retain access to territories where they sell products but lack their own distribution networks.
The three-year rolling agreement has raised eyebrows in some political circles Down Under however, and Fonterra may need to be extra transparent about how volumes would be transferred to its other business arms, should Lactalis decide to source from elsewhere.
Consumer brands’ limited global brand reach
Fonterra’s consumer brands are strong in Australia, but lack global scale – and competing in consumer markets requires investment and capabilities that are outside Fonterra’s core strengths.
The New Zealand co-op won’t be missing out on value-add opportunities without its consumer brands – because its B2B output, such as specialty dairy ingredients, offer exactly that – products that command a premium over basic dairy commodities.
Enabling a strategic refocus
Fonterra has been on a path to simplify its business throughout the last decade – selling off international businesses and exiting non-strategic JVs along the way.
The sale of Mainland Group looks to be the last piece of the puzzle (with the caveat that Fonterra has retained its consumer business in Greater China) as the co-op focuses on its ingredients and foodservice capabilities.
It’s a strategic pivot years in the making – and one that clearly offers solid financial returns for the organization.
Why the deal shouldn’t be approved
Loss of diversification
Disposing of its consumer portfolio and focusing on B2B services would leave Fonterra more exposed to commodity cycles and global shocks, as noted by Northington Partners.
But the advisors think the consumer arm was only a small buffer. “While the Consumer channel may have offered a natural hedge to commodity milk price cycles in the past, we note that the Mainland business itself has a relatively high level of earnings volatility and historically provided limited diversification benefits,” they reported.
Reduced consumer presence
Relinquishing ownership of flagship consumer brands such as Anchor and Mainland will be a tough pill to swallow for many farmers Down Under.
And while New Zealand milk will still be sourced from Fonterra farmers to make those product, a unique tie will be severed.
It would also result in a less diversified portfolio for the co-op: but as discussed above, the consumer channel had offered only marginal benefits to Fonterra in that sense.
Greater exposure to China
China is already Fonterra’s largest market – and if Mainland’s divestment goes through, China’s contribution to the co-op’s earnings will be greater, rising from 28% to 34%.
This earnings exposure represents a material risk to the co-op and investors would be following closely how that risk would be managed if the deal is voted through.
According to Northington Partners, China is more exposed to geopolitical instability than Mainland’s other markets. It’s also undergoing structural changes – notably the stronger state’s backing of domestic dairy players and the increase of the Chinese milk pool. All that might impact Fonterra’s business in the region.
Potential loss of milk sales
While Fonterra and Lactalis are bound by two long-term milk supply agreements, the three-year rolling Global Supply Agreement (GSA) leaves something to be desired.
Significant volumes of fluid milk and ingredients are traded through the GSA by both parties. Its shorter three-year term – designed to enable both parties to re-negotiate a fair market price over time – has a three-year termination term after year 3, meaning that Lactalis could opt to source milk elsewhere, reducing volumes even before full termination is achieved.
The risk of this happening is considered low according to Fonterra and their advisors Northington Partners, who have assessed that the next owner of Mainland Group would need to source similar volumes via the GSA in the coming years: making the contract mutually beneficial for Fonterra and Lactalis.
How would the vote go?
Lactalis’ deal represents a strong proposition for Fonterra: one that would free the co-op up to pursue high-growth B2B markets while lining its shareholders’ pockets handsomely and giving its prized consumer brands a new owner with capacity to invest in their growth.
Suppliers and investors alike would be cautious about how Fonterra’s leadership would navigate the risks stemming from the divestment, but one thing is clear: another offer of this size may be hard to come by.
