New Zealand-based dairy giant, Fonterra, confirmed it has made a takeover bid for Australia’s second biggest dairy processor Murray Goulburn.
The bid follows a call by Deutsche Bank for first-round bids for the Melbourne-based dairy co-operative earlier this month, and became known on the same day that Fonterra released its full-year results, which includes a 12 percent increase in revenue year-on-year to US$15.52 billion on the back of strong performance from its customer and foodservice business. Overall, the $22 billion business posted a decline in earnings before interest and tax of 15 percent, and a decline in after-tax profit of 11 percent. However, Fonterra Australia went far in offsetting these results, reporting profit before interest and tax of $62 million.
“We have been clear and single minded about delivering to strategy, leveraging our scale efficiencies and prioritising value and higher margin products. At the same time, we have tapped into the expertise of our people to come up with innovative ways to generate higher returns for the future,” said Fonterra CEO Theo Spierings.
The undisclosed bid by Fonterra would still need to be approved by a vote of Murray Goulburn shareholders, and that is not the only hurdle to clear. Rene Dedoncker, managing director of Fonterra Australia, told The Australian that the unconditional and non-binding offer will likely face intense scrutiny from the Australian Competition & Consumer Commission.
Fonterra has been increasing its share of the Australian dairy supply market in recent years, and since 2015 has unseated Murray Goulburn as the largest dairy processor in Australia. Since then, Fonterra Australia has raised its milk collection volumes to more than 2 billion liters per years, while over the same time Murray Goulburn has seen its collections drop from 3 billion liters to 2 billion liters per year. And indeed, this is a trajectory that doesn’t look to slow in the near future, with Fonterra Australia’s seven processing sites across Tasmania and Victoria operating at full capacity, with farmers on a waiting list to supply milk to the company.
Although further details of the bid were not disclosed, Dedoncker expressed that Fonterra is well-positioned for expansion, and noted his belief that combining Fonterra and Murray Goulburn – which would create a company collecting between 40 and 50 percent of the milk produced in Australia – would be a positive move.
“We’ve got a business that is in good shape. We have made some tough calls, divested the things that didn’t work for us and now we are able to pay a competitive milk price to our farmers,” Dedoncker told The Australian. “We are now looking to build on that base with expansion linked to growing customer demand for consumer dairy, food service products and dairy ingredients; we think an alternative growth strategy path for us could include Murray Goulburn.”
Granted, it is reported that up to six bidders including A2 Milk, Saputo, Parmalat, Bega Cheese and China’s Yili placed bids for Murray Goulburn, but due to the potential impact of the Fonterra bid, Australia’s Competition & Consumer Commission is monitoring developments as they unfold.
“If we’re talking hypothetically about two of the largest players proposing to merge, yes, you would think that would have a likely affect [sic] on competition in the dairy industry,” Mick Keogh, agriculture commissioner for the Australian Competition & Consumer Commission, told ABC, adding, “It’s probably too early to foreshadow any of that at the moment.”
In 2014, Gary Helou, CEO of Murray Goulburn, foretold the current state of the Australian dairy industry – predicting that the number of dairy processors in Australia would contract by half within the next three years, stating that there is simply not enough of a profit pool to support the country’s number of processors. At the same, Helou stated that the Australian industry needed to shift its focus beyond the domestic market to China’s powdered milk market, and announced Murray Goulburn’s plans to invest approximately $500 million over the next three years to increase production of milk powers, cheese, and “better for you” dairy drinks.
By March 2016 the company announced that it had successfully signed two major supply deals with U.S.-based, global infant nutrition giant Mead Johnson, and Indonesia’s leading nutritional company Kalbe Nutritionals – two deals that were supposed to position the company to construct a new $300 million nutritional powders plant in western Victoria to supply Asian markets, but 18 months later a call went out for first round bids for the co-operative.
-Lynda Kiernan