Fonterra Co-operative Group has announced a “step-change” in its strategic direction as it considers selling its major brands and other assets.
The New Zealand dairy co-op said that the move would seek to deepen its position as “a world-leading provider of high-value, innovative dairy ingredients”.
The co-op is to explore full or partial divestment options for some or all of its global consumer business, as well as its integrated businesses Fonterra Oceania and Fonterra Sri Lanka.
The announcement follows the completion of a strategic review which the co-op said has reinforced the role of its core business.
Fonterra
Fonterra’s global consumer business includes a portfolio of market leading brands such as Anchor, Mainland, Fernleaf and Western Star.
Fonterra Oceania, recently created through merging Fonterra Brands New Zealand and Fonterra Australia, comprises consumer, foodservice and ingredients businesses.
While Fonterra Sri Lanka comprises consumer and foodservice businesses.
Fonterra chief executive, Miles Hurrell said that a divestment “would help create a simpler, higher performing co-op”.
“We believe we can grow further value for the co-op by focusing on being a B2B [business to business] dairy nutrition provider, working closely with customers through our high-performing ingredients and foodservice channels.
“This will be enabled by strong relationships with farmers, a flexible manufacturing and supply chain footprint, deeper partnerships with strategic ingredients customers, further investment in our foodservice channel, continued delivery on our sustainability commitments and investment in innovation,” he said.
Hurrell said that Fonterra has “received unsolicited interest in parts of these businesses, making now a good time to consider their ownership”.
Assets
As a next step, Fonterra will appoint advisors to assist with assessing divestment options.
“We recognise a divestment of this scale would be significant for Fonterra.
“Throughout this process we will be considering how best to maximise overall returns to our farmer shareholders and unit holders.
“The choices we make when considering divestment options will be driven by a clear-eyed view of the best value creating pathway for the co-op – both in terms of the potential proceeds from a sale and the ability for Fonterra to generate consistent economic returns over the long-term,” Hurrell said.
“We expect a divestment process to take at least 12 to 18 months. If we were to proceed with a divestment of this size we would seek shareholder support,” he added.
Collectively, the businesses in scope for potential divestment utilised approximately 15% of the co-op’s total milk solids.
They also represented approximately 19% of Fonterra’s group operating earnings in the first half of the 2024 financial year (FY24).
Strategy
On the back of the announcement, the co-op has withdrawn its financial targets to 2030, along with scrapping its share buyback programme, which was expected to run until August 13, 2024.
“At all times, we remain committed to maximising returns through the Farmgate Milk Price and dividends, and achieving a strong return on capital that is greater than farmers’ cost of capital.
“Fonterra will continue to provide updates on our forecast Farmgate Milk Price and earnings guidance as part of our quarterly reporting process or as required. Our FY24 forecast earnings are not impacted by this announcement.
“The co-op’s sustainability targets and associated investment plans remain unchanged.
“Fonterra also remains committed to improving cost efficiency across the Co-op and will continue to report progress against efficiency measures annually,” Hurrell said.
Fonterra said that it will provide a further update on its revised long-term strategy in due course.