Meiji the dark horse for Fonterra’s Mainland Group, but Bega not to be discounted

Fonterra spin-off Mainland Group is expected to sell for at least $2bn.

Japanese food group Meiji Holdings is said to be shaping up as a so called “dark horse” in Fonterra’s sale of its Mainland Group business, say sources.

But one view around the market is that it may still not rule out Bega Group in the final hour.

Bega Cheese has once again demonstrated its eagerness to buy Mainland assets, telling the market on Monday that it had alerted the Australian Competition and Consumer Commission that it intends to lodge an application with the ACCC imminently for the regulator’s informal merger clearance of Bega’s potential acquisition of Fonterra Oceania (a unit which sits within Mainland Group).

Bega has been locked out of Fonterra’s data room, despite publicly expressing its desire to buy the business.

Its exclusion centres on a legal dispute unfolding about whether it has first right of refusal over the business because Fonterra has a commercial agreement in place to sell Bega-branded products.

Bega’s brands are worth about 6 per cent of Mainland’s annual sales of about $NZ4.9bn ($4.5bn), and any buyer would see them as a critical part of the overall business.

Fonterra sought a legal ruling on what Bega’s rights were over its brands with respect to the change of control clauses.

However, the case in the Supreme Court of NSW was dismissed and Fonterra was ordered to pay costs.

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

Fonterra told the market last month that it had started proceedings in the Supreme Court of NSW Court of Appeal, seeking leave to appeal the decision of the Supreme Court of NSW.

However, some believe it is still possible that the two parties settle the matter out of court and question whether the move to appeal the decision is a negotiating tactic by Fonterra.

Bega could still end up as the buyer, but with the appeal pending, it provides Fonterra with more leverage, where it can agree to drop the case if Bega caves in to some of its demands.

The $2bn-plus sale of Fonterra’s food services businesses in Australia, New Zealand and the Pacific as well as an ingredients business in New Zealand and the Pacific is understood to have been a drawn-out and costly affair for the New Zealand dairy giant.

Consulting firm McKinsey & Company is understood to have played a significant role, and such services do not come cheap, while three investment banking advisers are on the ticket, including Jarden, JPMorgan and Craig’s.

The spin-off that has been named Mainland Group sells dairy brands such as Bega, Perfect Italiano Cheese, Western Star butter, Mainland Cheese and Anchor butter.

Lactalis, advised by Rothschild, has shown interest in all of the offering, and sources say it is unlikely to partner with Bega, despite the focus of the French group being the Asia business.

But the attention in recent days has turned to Meiji Holdings.

While some had earlier played down its interest, with suggestions Japanese groups take too long in sale processes, others believe the manufacturer of foods including ice cream, yoghurt and milk could be a serious contender.

The other option is a listing of the Mainland Group business, but any activity around that part of the deal has recently been quiet.

Mainland generates $NZ200m of annual earnings before interest and tax.

As part of the deal, Mainland also includes consumer operations in Southeast Asia, Sri Lanka and the Middle East and Africa, and a food service business in Sri Lanka.