Strategic shift: Fonterra to divest Oceania and Sri Lankan businesses for dairy ingredients focus

17 May 2024 --- Dairy giant Fonterra is planning “full or partial divestment” of some or all of its global consumer businesses, including Fonterra Oceania and Fonterra Sri Lanka. The move is expected to be a “step-change in strategic direction” for the company to prioritize its dairy ingredients production. 

“We believe we can grow further value for the co-op by focusing on being a B2B dairy nutrition provider, working closely with customers through our high-performing Ingredients and Foodservice channels,” says Miles Hurrell, CEO of Fonterra.

“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.”

The divestiture process is expected to take 12 to 18 months, should the company proceed. 

The company has also withdrawn its financial targets declared in 2021 and terminated its on-market share buyback program, which was expected to run until August 13, 2024.

Meanwhile, Fonterra’s global markets CEO, Judith Swales, has decided to exit the dairy cooperative.

Handing over ownerships
Fonterra Oceania creates dairy products in Australia and New Zealand and sells dairy ingredients to food companies, while Fonterra Sri Lanka includes the co-op’s dairy brand Anchor that formulates products like full cream milk powder, liquid milk, yogurt and flavored milk in the country.

Throughout the divestment process, Fonterra plans to maximize overall returns to its farmer shareholders.Both the businesses utilized approximately 15% of the co-op’s total milk solids and represented approximately 19% of Fonterra’s group operating earnings in the first half of financial year 2024, notes the company.

“While these are great businesses with recent strengthening in performance and potential for more, ownership of these businesses is not required to fulfill Fonterra’s core function of collecting, processing and selling milk,” underscores Hurrell.

“Due to our cooperative structure, we believe prioritizing our Ingredients and Foodservice channels and releasing capital in our consumer and associated businesses would generate more value.”

Meanwhile, the company has received “unsolicited interest in parts of these businesses,” which he believes could allow a new owner with the right expertise and resources to take the businesses further.

In 2022, Fonterra and Nestlé sold their Brazil-based Dairy Partners Americas joint venture to French dairy company Lactalis for BRL 700 million (US$131.5 million). 

“Clear-eyed view”
Fonterra will now appoint advisors to assist with analyzing divestment options, for which it seeks shareholder support.

“We recognize a divestment of this scale would be significant for Fonterra. Throughout this process we will be considering how best to maximize overall returns to our farmer shareholders and unit holders,” says Hurrell.

“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.”

Fonterra Sri Lanka formulates liquid milk, yogurt and flavored milk in the country.Fonterra’s Resource Allocation Framework, which allocates funds to debt repayment, will guide the decisions regarding how to use net proceeds from sales.

Sustainability moves
As the market for dairy proteins diversifies, it has opened up more opportunities for Fonterra to focus on sustainable ingredient production.

The company focuses on tackling climate change and sustainability hurdles through farmer incentives and partnerships to reduce emissions. It is targeting a 50% absolute reduction in Scope 1 & 2 emissions by 2030, for which it recently teamed up with Nestlé to assess and research ways of reaching net zero carbon emissions from its traditional dairy practices. 

In financial year 2023, Fonterra’s Ingredients business represented nearly 80% of the co-op’s New Zealand milk solids sold and returned US$17.4 billion in revenue by selling a range of products, from high quality powders to premium proteins.

Its consumer business represented approximately 7% of the co-op’s New Zealand milk solids sold and earned US$3.3 billion in revenue the same year by selling dairy products such as fresh milk, cheese and butter.

By Insha Naureen