Fonterra’s Australian Business: Questions Remain
New Zealand’s leading business, Fonterra, is under scrutiny for its decision to hold onto an underperforming Australian business. Despite recent strong financial results, this move has raised eyebrows among analysts, as the Australian venture has seen significant capital investment but has yet to yield satisfactory returns. Arie Dekker, a Jarden analyst, has called for the company to provide a clear reasoning behind this decision, suggesting that a well-executed divestment could potentially offer a substantial capital return to Fonterra’s farmer-shareholder owners. From 2013 to 2020, Fonterra Australia generated operating cashflows of A$150m, while the core net capital expenditure reached A$550m.
Lack of Transparency Concerns Analysts
In addition to voicing concerns about the Australian business’s performance, Dekker has criticized Fonterra for the lack of transparency regarding its future plans. Despite some improvements in performance, Dekker argues that there are many unanswered questions about its long-term viability. He insists that the company needs to provide more clarity on why it is retaining the Australian business, which he argues is not a core part of the company. If a convincing case for keeping the business was made, and its performance could be consistently monitored, Dekker would be more accepting of the decision.
Other Troubles for Fonterra
The Australian business is not the only point of concern for Fonterra. The company’s New Zealand consumer business has also been put forward for future review, following a loss of $164m in the group’s consumer business. Impairments were also noted in Fonterra Brands NZ ($121m) and Asia brands ($101m). However, Fonterra CEO Miles Hurrell has stated that there will be no change to the Australian business, which exports dairy ingredients and produces consumer products.
Fonterra’s Defence
In response to criticism, Fonterra’s current stance is that the Australian business is a key part of the consumer strategy going forward and that its performance is improving. While this reasoning has been deemed as insufficient by Dekker, the company has remained firm in its decision. Hurrell has reiterated that the business is performing well and that he is pleased with its progress.
