Buying Fonterra gives Emmanuel Besnier’s Lactalis big foothold in Australian dairy
At 14 times historic earnings, the $4.2bn purchase is not cheap, even if it fits the Lactalis boss’s desire to widen his business offering and extend more into Asia, which is now just a fraction of his empire.
France-based Lactalis earns 52 per cent of its profits from the EU, 33 per cent from the Americas and 15 per cent from Africa and Asia.
With annual turnover of around $50bn, it is the world’s biggest dairy business ahead of Nestle, with Montreal-based Saputo earning around $21.3bn ranked 10th.
Lactalis and Saputo combined will collect just over 40 per cent of the 8.3 billion litres of milk produced in Australia, with the next largest, Bega, at about 15 per cent.
Australia it should be noted is only around 30 per cent of the Fonterra assets acquired based on the value of branded goods.
Still, interest from the world’s biggest dairy processor is undeniably good news for the local industry. Former Fonterra Australia boss Rene Dedoncker is a likely chief of the Lactalis Asian operations.
Any joy for Australian farmers may be mitigated by the fact that Besnier, who runs the family company, operates by controlling costs tightly and squeezing every bit of revenue he can from each litre of milk purchased.
That’s why he likes a broad operation from drinking milk, to cheese, to yoghurt, to baby food.
As an aside, Bega chair Barry Irvin’s decision to quickly settle the dispute with Fonterra over the marketing rights for Bega-branded cheese in Australia underlines the fact while he would like to get the Bega name in-house, the now 20-year-old arrangement he had with Fonterra will continue and is financially a very good one for Irvin.
Fonterra inherited the deal when it acquired Bonlac in 2004 in Australia and paid Bega $30m upfront plus an annual royalty of around $5m and another circa $5m to cover operating costs for Bega to cut and package the Bega-branded cheese, which is then marketed by Fonterra and now Lactalis.
On paper a great deal for Bega, which collects the money without the market risk, and at the time it was cited as a company-making deal which freed Irvin to expand into the wider consumer goods offering he now runs from milk to cheese, to vegemite and peanut butter.
In recent years Australian farmgate milk prices were above those in New Zealand and elsewhere outside the EC, and Irvin worried Fonterra would take advantage of the price differential by shipping more of its Mainland brand cheese to Australia,
This risked down playing Bega’s cheese.
On paper that is now less of a concern with Besnier in control.
Fonterra will now focus on the business-to-business market globally selling to food service companies and powdered milk for baby food among other buyers.
In Australia, cheese accounts for 41 per cent of the annual milk production, followed by market milk at 32 per cent and butter 20 per cent.
Some 63 per cent of production is based in Victoria from 66 farmers, which nationally have rationalised from 12,896 in 2000 to just 3889 last year, with farms getting bigger but the number of cows milked also falling from 2.2 million to 1.3 million over the period.
Just what it means to have 40 per cent-plus of production handled by two global dairy giants remains to be seen but at a state level Victoria has at least some competition, ironically because supermarket giant Coles is now a player, and Bega is also still around.
Tasmania is more concentrated because that was a Fonterra stronghold.
Fonterra was advised by Jarden, JP Morgan and Craigs and Lactalis by Rothschild.
Breaking tradition
In an almost revolutionary move, Ken MacKenzie will be the first eastcoaster to chair the 111-year-old Perth-based Wesfarmers conglomerate when he takes over from 33-year company veteran Michael Chaney late next year.
The move also breaks recent practice of returning former chief executives to the chair after an appropriate absence, a welcome governance change.
MacKenzie, the Melbourne Business School chair, stepped down from the BHP chair this year but made his name in Australia in his decade running Amcor from 2005, when he nearly quadrupled the company’s market value from $4bn to $15.5bn, and increased return on equity from 10 to 19 per cent.
Wesfarmers has historically preferred to appoint executives and directors from within a 5km radius of Perth suburb Mosman Park, so the Melbourne-based MacKenzie’s nomination is a huge break from tradition, marking perhaps a wider changes ahead.
But the former BHP chair is closely allied to Wesfarmers’ culture focused on capital management and shareholder returns.
He confided in a statement: “I’ve always been a believer in disciplined capital allocation, and Wesfarmers is a great example of what can be achieved when this is done well.”
Next year, the then 76-year-old Chaney will also step down from the Northern Star Resources chair, marking his official retirement from public company life.
Corporate legend Chaney (aka Kate’s dad) has had a storeyed career having also served as chair of NAB and Woodside, and a one-time head of the Business Council.
Long before it became trendy he was a pioneer of ESG as the driver of better shareholder returns and in 1988 the John Argenti protege wrote in the company’s annual report noting sustainable earnings are “only possible over the long term by looking after customers, staff, the environment, suppliers, communities in which it operates and acting with integrity and honesty”.
The then farmers co-op listed in 1984, a year after Chaney joined the group and 45 per cent of its share register is still retail, with long-term farmers who converted their circa $1000 trading bonus into shares now worth $2.3m.
In 2001 the company paid $2.7bn for Howard Smith, taking Bunnings national, and the division ($2.3bn) now accounts for 51 per cent of the company’s $4.5bn earnings.
Throw in Kmart ($1.12bn) and the two retail divisions account for 75 per cent of earnings.
The handover to MacKenzie won’t be formalised until October next year, but having played a senior role with the company for 30 per cent of his life, Chaney’s legend will live on.
Health revolution
In his four years as Medibank boss, David Koczkar has quietly revolutionised the health insurer, transforming it into a consumer health group with 10 per cent of earnings now derived away from insurance.
He figures it’s just a matter of following customer demand and in doing so creating a more resilient company with his network now covering GPs, short -stay hospitals, home care, life and pet insurance and a focus on preventive care to help people to stay out of hospital.
This said, with 26.5 per cent of the private health insurance market, he is also sticking close to his core but with markets outside the base insurance operations now four times bigger than core insurance and growing at more than roughly three times the pace.
Some 1500 of Medibank’s 4000 staff are now employed by the health services business and this number is growing fast.
Aje, White Fox, Paspaley, Lew scion on ASIC’s tardy list
Legend has it when Lino Saputo paid $1.3bn to acquire Australia’s then biggest dairy processor, Murray Goulburn, in 2018, French billionaire Emmanuel Besnier was unimpressed – but now he has his revenge after buying Fonterra’s Asian consumer dairy business.