New Zealand dairy farmers could be in for a big pay day if Fonterra Cooperative Group follows through on plans to exit its global consumer businesses.

Auckland-based Fonterra, the world’s largest dairy exporter, is considering turning away from branded consumer products to concentrate on making more high-value ingredients derived from New Zealand milk that it sells to other companies like Nestle, Mars and Coca Cola.

The operations it’s looking to divest are currently valued at NZ$3.4 billion ($2.1 billion), and analysts said the lion’s share could be returned to Fonterra’s roughly 8,300 shareholding farms.

“If they divested the full gambit of these consumer businesses, that would pave the way for a very significant capital return,” said Arie Dekker, head of research at Jarden Securities in Auckland. He estimates the return could be as much as NZ$2 per share, and said the average New Zealand dairy farmer probably has between 170,000 and 180,000 shares. There are about 1.6 billion shares on issue.

Fonterra is continuing to retreat from an ill-fated global expansion implemented last decade by former Chief Executive Officer Theo Spierings, who departed in 2018. Under current CEO Miles Hurrell, the dairy giant has sold assets in China and South America and jettisoned iconic New Zealand ice-cream maker Tip Top.

Now it wants to divest all or some of its remaining consumer operations that include brands such as Anchor, Anlene and Mainland as well as Fonterra Oceania and Fonterra Sri Lanka, which together account for about a fifth of its revenue.

It would then increase production of ingredients like high-value nutritional milk powders and milk-derived proteins that it sells directly to commercial customers for use in other products, such as energy drinks. It will also continue to make foods consumed in restaurants or in pre-prepared meals, such as cream cheese, UHT cream and mozzarella.

‘More Focused’

“It’s about focusing on what we are good at,” Hurrell told NZME’s The Country radio show on Thursday. “We have world-class ingredients and foodservice businesses and there is a lot more value to be extracted from those businesses by being more focused, more targeted.”

The consumer product range includes fresh milk, cheese, yogurt and butter, which Fonterra said requires specialized expertise and marketing to reach the end customer. The assets include 17 manufacturing sites globally, of which three are in New Zealand.

Selling them would allow a new owner with the right knowledge and resources to unlock their full potential, Fonterra said, adding it expects to continue supplying milk to the brands.

The process could take 12 to 18 months and the sale requires shareholder approval.

When Fonterra sold its Soprole business in Chile last year for about NZ$1 billion, it generated a capital return of NZ$800 million, or 50 NZ cents a share.

Matt Montgomerie, senior analyst at Forsyth Barr in Auckland, sees scope for “material capital returns” on the sale of the consumer assets, which he estimates could reap NZ$2.5 billion to NZ$3.5 billion or more.

Balance Sheet

“The balance sheet’s already in good shape, so I think they could return most, if not all of it,” Montgomerie said. “I think there’s an element of Fonterra needing to help support farmers.”

Still, there may also be a need for more investment, including in research and development, and potentially more infrastructure, said Hamish Gow, a professor of agribusiness at Lincoln University near Christchurch.

“There’ll be strategic investment, and then there’ll be a question about actually how much do they just give back to farmers,” he said.

Hurrell stressed the co-operative’s balance sheet is strong so the sale is not “defensive” and will leave the board with a range of options including further reducing debt, investing more in the remaining businesses or returning money to shareholders.

Analysts said potential suitors for the assets could include financial investors and big players already in the dairy sector who are able to achieve synergies.

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