Analysis Dairy
FrieslandCampina linked to Fonterra, is that realistic?
FrieslandCampina reportedly has interest in the factories that the New Zealand dairy cooperative Fonterra wants to divest in Australia. This was reported by the Australian newspaper The Australian, based on insiders from the dairy industry. Whether the rumors are unfounded is not easy to say. Nevertheless, a possible takeover does not seem very likely in advance, given the shrinking strategy that the Dutch dairy giant has been using in recent years. But it is not completely unlikely either.
FrieslandCampina is said to have already submitted an unsolicited bid at the end of 2023, together with Pacific Equity Partners, to partially or fully take over Fonterra's Australian operations, as reported by the Australian newspaper, which generally operates conservatively in such reports. FrieslandCampina spokesperson Jan Willem ter Avest neither confirms nor denies the alleged interest, as they follow standard policy when it comes to takeover, sale, or merger rumors, as he indicates.
No small beer
Fonterra has engaged several investment banks, including the American JP Morgan, at the end of July to assist in the sale. The sales process is likely to pick up steam by the end of this year, according to the newspaper. Besides FrieslandCampina, various private equity investors are said to be interested. A takeover by Saputo or Bega, two other major dairy processors in Australia, seems unlikely in advance. This is because the local competition authorities are likely to intervene. Australian dairy farmers were already unhappy that Fonterra wanted to get rid of the factories. They fear that reduced competition among processors will not benefit milk prices. In addition to FrieslandCampina, Lactalis is also mentioned as another potential buyer, being a more obvious choice as the French dairy giant is already active in Australia and globally pursues an aggressive growth strategy.
The activities of Fonterra in Australia are certainly not insignificant and are estimated by analysts to be worth €1.8 billion. Fonterra processes 1.4 billion liters of milk annually in Australia, spread across eight factories in the states of Victoria and Tasmania.
Shrinking strategy in recent years
It is difficult to assess how serious FrieslandCampina's interest is. In recent years, the Dutch dairy giant has not pursued a growth strategy. They exited Germany last year. In 2021, FrieslandCampina closed its operations in Russia just before the war broke out in Ukraine. In recent years, various factories have also been closed in their home markets. However, FrieslandCampina has invested in two new factories in Southeast Asia. Two modern production facilities were recently completed in Indonesia and Malaysia, allowing them to tap into interesting growth markets in that region.
Australia could theoretically also serve as a hub to this region. Moreover, Australian dairy farming could be a way to secure the milk supply to Western standards for the future, which may be more challenging in Europe. After years of decline, Australian dairy farming is once again growing. In the past production year 2023/24, production increased by about 3% due to better climate conditions.
Overcoming skepticism
If the top management of FrieslandCampina indeed wants to venture Down Under, they still need to convince the cooperative's members to agree to this. There is sometimes skepticism among the cooperative base regarding foreign investments. Other stakeholders, such as credit rating agency Fitch, are also cautious. They have been advocating for a conservative approach for years when it comes to mergers and acquisitions by the Dutch dairy giant. Furthermore, FrieslandCampina is still in the midst of a reorganization, although somewhat surprisingly, they seem to be on track for a record profit in 2024, as indicated by the recently published half-year figures.
