Fonterra sells China farms as part of debt reduction program

05 Oct 2020 --- Fonterra has agreed to sell its China farms for a total of AU$555 million (US$398 mn) after successfully developing the farms alongside local partners. Fonterra expects to use the cash proceeds from the two transactions to pay down debt, as part of its previously announced overall debt reduction program.

Inner Mongolia Natural Dairy Co., Ltd, a subsidiary of China Youran Dairy Group Limited, has agreed to purchase Fonterra’s two farming-hubs in Ying and Yutian for AU$513 million.

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

Establishing farms in China has been challenging
CEO Miles Hurrell says in building the farms, Fonterra has 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,” he says.

“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.”

In August, Hurrell confirmed the appointment of Teh-han Chow to CEO Greater China who is said to have made an impressive contribution during these unprecedented times. 

Hurrell adds the sale of the farms will allow the New Zealand multinational dairy co-operative to prioritize 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 cooperative today. Selling the farms is in line with our decision to focus on our New Zealand farmers’ milk.”

China remains a strategic market 
“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 Foodservice, Consumer Brands and Ingredients businesses in China,” Hurrell continues. 

“We will do this by bringing the goodness of New Zealand 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 centers in China will support this direction,” Hurrell notes.

Completion of the sale, which is subject to antitrust clearance and other regulatory approvals in China, is expected to happen within this financial year.

Fonterra says that through the sale process and strategic review of its China Farms, it has gained additional information and further insights and, as a result, revised down the valuation of these assets.

The transaction value is subject to customary purchase price adjustments and exchange rate movements. Any gains or losses on the sale would be normalized upon completion of the sale. 

Fonterra expects to use the cash proceeds from the two transactions to pay down debt, as part of its previously announced overall debt reduction program.

Edited by Gaynor Selby

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