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.