Fonterra wants to offload Bega Cheese, Western Star

Famous dairy brands such as Bega Cheese and Western Star butter are among assets that NZ dairy giant Fonterra wants to sell. Will it be time for Bega Group to buy back its brand?

Dairy giant Fonterra wants to get back to basics. Picture: Dannika Bonser

Global dairy giant Fonterra is going back to basics and will sell famous Australian cheese brands Bega, Perfect Italiano and Western Star butter in a broadscale exit from consumer businesses to focus on its “core function of collecting, processing and selling milk.”

It’s an about-face from the Australian-listed New Zealand dairy company, which has steadily built up an enviable brand portfolio over many years and has previously considered an initial public offering of its Oceanic brands with long-term milk supply agreements in place.

The company said it had received approaches about selling those retail brands and believes it best serves its farmer shareholders and unitholders by production of milk, milk and protein powders and direct to business dairy products.

“We believe Fonterra is not the highest-value owner of the Consumer and associated businesses in the longer term and a divestment could allow a new owner with the right expertise and resources to unlock their full potential,” said Fonterra chief executive Miles Hurrell in a statement.

“A new owner could help these businesses to flourish… we have also received unsolicited interest in parts of these businesses, making now a good time to consider their ownership,” says Mr Hurrell.

Parts of the business, including the “Bega” brand name, would likely be appealing to ASX-listed Bega Group, which sold the naming rights to Fonterra back in 2001 in a 25-year deal that ends in just under two years. Fonterra has previously owned a stake in Bega Group.

Bega Group could not be immediately reached to comment on the Fonterra sale.

The Perich Group has also been flagged as a potential bidder, but an insider said it is currently focused on turning around Noumi, formerly known as Freedom Foods, which makes long-life and protein dairy products and milk alternatives.

Certainly among those running the numbers would be private equity firms who are still sitting on record dry powder.

Globally, Macquarie Group estimated that at the end of last year, there was an unprecedented $US2.59 trillion to spend. In Australia, the level is thought to be closer to $35bn, although higher interest rates may cap valuations.

The value of the businesses being sold are hard to ascertain because products such as cheese tend to trade at commodity level margins rather than that of most processed foods.

Last year, Fonterra’s consumer business produced $781m in gross profit off of revenue of $3.3bn, which means its margin is likely to be in the order of 10-12 per cent.

The division accounts for about 7 per cent of the milk it receives from its New Zealand farmers and has 17 global manufacturing sites, with just over half of these located in Victoria.

In the six months to January 2024, the consumer unit accounted for 17 per cent of Fonterra’s total revenue.

The consumer division has a footprint across Australia, New Zealand, Sri Lanka, China as well as the US, the Middle East and Africa.

All or parts of Fonterra’s Oceania business would be of interest to Bega Cheese, according to E&P Capital.

“In our view, Bega’s highest interest levels would be in Fonterra’s Australian operations. However, we would not rule out interest in the other regions (such as New Zealand),” E&P retail analyst Phillip Kimber said.

“There is already a relationship in Australia where Fonterra markets and sells the Bega cheese brand under license from Bega. Bega reported $11m of royalty revenue in FY23 – the majority of which would relate to this agreement with Fonterra.”

Fonterra’s decision to sell comes amid increased activity in the agri-sector.

Supermarket giant Coles took the unusual step a year ago of buying two factories from Canadian dairy giant Saputo in a move that will protect the supermarket’s access to its private label milk as Australia’s dairy industry battles an existential crisis.

Saputo for decades has invested hundreds of millions of dollars expanding into the Australian dairy market, buying up local processors and facilities, but last year reduced its size and scope and was seen as a desperate seller of the facilities in Laverton North, Victoria, and Erskine Park, NSW.

Australia’s largest cotton ginner Namoi Cotton is currently the subject of a takeover battle between two of the world’s biggest commodity traders, Louis Dreyfus and Olam Group.

On Thursday, the Australian Competition & Consumer Commission flagged it had “concerns” with the Louis Dreyfus proposal.

“The ACCC is concerned that the proposed acquisition would be likely to substantially lessen competition in the supply of cotton ginning services in the north of Western Australia and Northern Territory and the supply of cotton lint classing services,” the competition regulator said in a statement.

Originally published as Fonterra wants to offload Bega Cheese, Western Star