Fonterra sells farms in China to reduce debt and get back to basics

Dairy  giant  Fonterra  has  scooped in  $555 million by selling  its   China  farms  and is now aiming to unload   its yogurt business, a partnership with Nestle, located in Brazil, as  it  pursues  its  strategy of seeking  greater value, rather than volume,  in its  business.

Fonterra CEO Miles Hurrell   conceded  the  China  farm  business

“ … has  been a tough journey for us along the way, we had to take an impairment to that asset in 2019 and again in 2020 so certainly they haven’t been as operationally effective as we would have liked.  That said, we have made significant progress of late and that’s put us in a better position to sell these assets.”

Fonterra  is  expected    to  use   the proceeds to pay  down  debt  which under  Hurrell’s  watch  has  already been trimmed  in the past year  to $4.7bn  after  peaking at  $7.1bn.  His  turnaround  strategy has been to get back to  basics, dropping the  concept of  building a global  milk pool to  focus instead  on the value of  NZ-produced  milk.

It’s  a  strategy  that is  being closely  watched  by  Fonterra’s farmer-suppliers  as  the  co-op drives  towards  higher  profitability  and  shakes  off  the   nasty  losses  it  made  in 2018  and  2019.

The  co-op is the world’s  sixth- largest  dairy  company   by revenue,  but  many  among its  farmer-owners  believe  it has yet to  fulfill  its potential.  They  question   why  Fonterra   launched into so  many unprofitable   investments  abroad.

Hurrell  defends  the  China   farms   venture.  In retrospect, he  says, the investment was a good move.

It was always part of our plan to support the local dairy industry in China, that was certainly the intention going in… it wasn’t the intention to lose money but the strategic intent still remains”.

The proceeds would be used to pay down debt.

We still have some work to do around our balance sheet so it’s intended at this point to pay down debt and focus on that in the near term.”

He  contends the sale of the farms will allow the co-op to prioritise the areas of its business where it has competitive advantages.

“For the last 18 months, we have been reviewing every part of the business to ensure our assets and investments meet the needs of the co-op today.  Selling the farms is in line with our decision to focus on our New Zealand farmers’ milk.  China remains one of Fonterra’s most important strategic markets, receiving around a quarter of our production.  Selling the farms will allow us to focus even more on strengthening our food service, consumer brands and ingredients businesses in China.

“We will do this by bringing the goodness of NZ milk to Chinese customers in innovative ways and continuing to partner with local Chinese companies to do so. Our investment in R&D and application centres in China will support this direction.”

Fonterra is selling  the China farms for a total of $555m (RMB 2.5 billion), after successfully developing them alongside local partners.   Inner Mongolia Natural Dairy Co Ltd, a subsidiary of China Youran Dairy Group Limited (Youran), has agreed to purchase Fonterra’s two farming-hubs in Ying and Yutian for $513m.

Separately, Fonterra has agreed to sell its 85% interest in its Hangu farm to Beijing Sanyuan Venture Capital Co., Ltd. (Sanyuan), for $42m. Sanyuan has a 15% minority shareholding in the farm and exercised their right of first refusal to purchase Fonterra’s interest.

Hurrell says that in building the farms, Fonterra demonstrated its commitment to the development of the Chinese dairy industry.

“We’ve worked closely with local players, sharing our expertise in farming techniques and animal husbandry, and contributed to the growth of the industry.

“We don’t shy away from the fact that establishing farms from scratch in China has been challenging, but our team has successfully developed productive model farms, supplying high quality fresh milk to the local consumer market. It’s now time to pass the baton to Youran and Sanyuan to continue the development of these farms.

Completion of the sale, which is subject to anti-trust clearance and other regulatory approvals in China, is expected to occur this financial year.

The  question now  being   asked   is whether  Fonterra   can   unload  its other major  Chinese  investment   in the  infant  food  company,  Beingmate,  which cost  the  co-op $755m  but has had to be written  by  more than $430m.

One thought on “Fonterra sells farms in China to reduce debt and get back to basics

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.