The world’s biggest dairy exporter, Fonterra Co-operative Group, may spin off its Australian arm after a strategic review, a move which would see the business list on the ASX with a valuation expected to be north of $1 billion.
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Fonterra Australia chief executive René Dedoncker at the dairy co-operative’s cheese factory in Victoria.

The Kiwi Co-op is owned by over 10,000 farmers and initially invested in Australia via the purchase of Bonlac Foods about 18 years ago.

Fonterra operates eight manufacturing sites across Victoria and Tasmania and employs around 1600 people. It collects milk from Australian farmers and manufactures well-known dairy brands such as Western Star butter, Bega cheese, and Perfect Italiano cheeses.

The business also sells dairy ingredients to many of the world’s largest food companies and sells to the foodservice industry.

The Co-op is also looking to hive off its Chilean assets: milk processor Prolesur, a subsidiary of Soprole which is a top consumer dairy brand also owned by Fonterra.

Through these divestments and improved earnings, Fonterra chief executive Miles Hurrell aims to return about $NZ1 billion ($970 million) to shareholders by 2024.

Fonterra Australia managing director René Dedoncker told The Australian Financial Review that a float is the preferred option, but a trade sale or private equity partnership may also be considered.

He was unable to say how much equity the Co-op would retain in the standalone business, the value of which could reach as high as $1.5 billion.

Fonterra has over $1 billion of assets in Australia, which generated about $69 million in earnings before interest in tax last financial year.

Mr Dedoncker said by changing the ownership structure Fonterra gets “the best of both worlds”, and the IPO will drive capital investment locally while the Co-op will focus on taking nutrition, science, provenance and sustainability to the world.

“We’re at a point where they know we need to invest to stay relevant and really deliver on our potential. Now we will work on exactly which option we go with, but the likelihood is that we’re all focused on an IPO,” Mr Dedoncker said.

Mr Dedoncker said the domestic business will be “doubling down” on innovation of products that sit on supermarket shelves and in restaurants with chefs.

Fonterra expects to appoint two investments banks within 10 days, and plans to make another announcement by Christmas about its plans.

The Co-op, which has been selling assets and cutting costs after big losses in 2019, said net debt was cut by $NZ872 million to $NZ3.8 billion in fiscal 2021.

In the past six months Fonterra has sold two dairy farms in China and in 2019 it sold Tip Top Ice Cream Company under advice from First NZ Capital (Jarden), which may make the firm a top contender for the IPO advisory role.

Jarden analyst Arie Dekker said the sales of the Chilean and Australian assets would be positive because they would shrink the capital base, help with further debt repayment and pave the way for the $NZ1 billion special dividends by 2024.

Fonterra’s 2021 financial results revealed a final Farmgate Milk Price of $7.54 a kilogram of milk solids, normalised earnings per share of NZ34¢ and a final dividend of NZ15¢, taking the total dividend for the year to NZ20¢ per share.

Reported net profit after tax fell $NZ60 million ($58 million) to $NZ599 million in the full year, but the previous financial year included gains from the divestments of DFE Pharma and Foodspring.

Normalised NPAT was up $NZ190 million to $NZ588 million, driven by improved earnings and lower interest expense. Group normalised EBIT was up 8 per cent to $NZ952 million. More people cooked at home amid the pandemic which boosted its consumer brands in New Zealand and Australia.

Fonterra’s 2021/22 earnings guidance range is NZ25¢ to NZ40¢ per share and its 2021/22 forecast Farmgate Milk Price is $7.25 to $8.75 per kilogram of milk solids.

Mr Hurrell said the strong milk price is likely to continue which is good for farmers. But this could squeeze the group’s sales margins and earnings.

Fonterra’s goals by fiscal 2030 include an average Farmgate Milk Price range for the decade of $6.50 to $7.50 per kgMS; a 40 per cent to 50 per cent increase in operating profit from 2021 which would lift dividends to NZ40¢ to NZ45¢ per share; and a group return on capital of 9 per cent to 10 per cent.

ASB hiked its expectations for Fonterra’s milk price to farmers to the top of the co-operative’s range, saying declining milk production will push payments to a record high this season.

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