Bega, Fonterra in standoff over brands

Bega’s brands are worth about 6 per cent of Mainland’s annual sales of about $NZ4.9bn

Bega Cheese appears to be playing hardball with Fonterra over the latter’s $2bn-plus Mainland Group sale process, after refusing to waive its legal right to take back its brand licences if the business is sold.

The talk in the market continues to be that the $1.65bn listed Bega is the most logical buyer of the dairy spin-off that features brands like Western Star butter, Anchor butter, Perfect Italiano and Mainland cheese, because it can extract synergy benefits.

But Fonterra is thought to be restricting Bega’s access to the data room in the second round of the sale process, as a negotiating tactic to force Bega to drop its legal rights, which could stop another party gaining the trademark licence for its brands.

Bega’s brands are worth about 6 per cent of Mainland’s annual sales of about $NZ4.9bn, and any buyer would see them as a critical part of the overall business.

But it seems Bega does not want to blink first, and some believe it is right to think so because it has leverage: it’s probably the party that will pay the most for the Oceania arm of Mainland, comprising most of the business.

Bega’s hope is probably that eventually Fonterra will back down at the end of the sale process and negotiate with it if other suitors do not pay up.

Market estimates are that Bega’s price limit does not extend beyond 10 times earnings, which is about what it has paid for assets before.

If Fonterra gets another group to pay beyond that, it could accept that or use that offer as a bargaining chip to get a higher price from the Kidder Williams-advised Bega.

An initial public offering or demerger is considered a backstop plan.

The market was this week informed about the outcome of Fonterra’s legal case over what rights Bega had in a sale, because of the commercial agreement Fonterra had to sell Bega branded products.

Fonterra sought legal advice to clarify how a sale would affect the operation of trade mark licence agreements between Bega and Fonterra, and change of control clauses within them.

The case was dismissed and Fonterra was ordered to pay costs.

The ruling was seen to be based on the fact that the outcome s hypothetical as there is not yet a deal, so uncertainty remains for other suitors in terms of Bega’s rights.

The contest, run by Craigs, Jarden and JPMorgan, is in the early stages of the second round.

Attention focused on Bega chairman Barry Irvin’s comments in the statement. He said: “We hope to work constructively with Fonterra Group on the sale of its Oceania businesses of which Bega Group is a natural acquirer and remains very interested in.”

Sources say if there was any doubt that Bega was not extremely keen to buy the Australia and New Zealand assets, this put it to rest.

DataRoom reported in March that Bega may raise equity to fund a deal.

While private equity firms like Warburg Pincus and Pacific Equity Partners bid, the main rival to Bega is considered Lactalis, advised by Rothschild, which was earlier said to be bidding for all of the Mainland global portfolio and is understood to be in the second round.

Industry giant Danone is also said to be there for part of the company, but may partner with another suitor.

Sources say that Fonterra has been keen for a clean sale in one line, and Bega would need a partner to buy the other offshore assets, although some believe that Fonterra is playing down Bega as the buyer.

The other complication for Bega is that it would require clearance from the Australian Competition & Consumer Commission, which would take time and delay an outcome.

Friesland Campina was interested in the Asian operations, and may partner with Bega, but there was a view it may have been excluded from the sale because buyers of the whole company were favoured.

Fonterra may challenge the legal ruling, although most believe this is unlikely.

Volatile market conditions do not help Fonterra’s case for an IPO of Mainland, but some observers suggest that given the complexities, spinning off the company by way of an IPO or demerger may be the cleanest option for Fonterra.

That way, it cannot be criticised for selling the business too cheaply or excluding Bega.

Once separately listed, the parties could then make a clean bid for the business.

Also weighing in favour of a listing is the fact that the change of control complications would not apply – Bega would not have the right to terminate its licensing deal.

Yet for some, that is still subject to debate and would certainly require clarification.

Fund managers may not be prepared to meet price expectations, as they would want to buy shares at a discount to Bega.

Some Fonterra shareholders are still lamenting the $380m sale of its ice cream business Tip Top to European group Froneri, a venture backed by Nestle and PAI Partners, after Tip Top was said to have substantially increased its value.

Yet the Mainland sale is designed to return funds to Fonterra’s co-operative owners in New Zealand, in order to invest in their own dairy farms there.

Mainland generates annual earnings before interest, tax, depreciation and amortisation of about $200m from its 15 manufacturing sites and sells to more than 20 countries.

Its Oceania business includes consumer brands and a food service business, along with an ingredients business in New Zealand.

It has a southeast Asia food service business and a Middle East consumer business.