Market analysts predict big cost savings if Bega buys Fonterra

Bega and Fonterra could become closer than ever if the NZ-based dairy giant goes ahead with a float of its Aussie operations.

Bega Cheese is suitably positioned to help loosen Fonterra Australia’s apron strings with its New Zealand parent, market analysts project.

Bell Potter analysts claim the cost savings could be substantial for Bega if it bought Fonterra, which declared last month it was considering a float of its Australian operations.

But they’ve added that Bega would have to raise new equity to fund such a move.

“Bega has a strategy to own iconic brands and the opportunity to repatriate the Bega brand, while adding Western Star would have to be compelling,” the market analysis says.

Fonterra licenses the Bega trademark for use in various cheese products from Bega in Australia and pays an annual royalty for the privilege.

In February, Victoria’s Supreme Court found Bega Cheese was entitled to use the Bega logo on foods which fell outside the scope of a 20-year-old licensed product deal with Fonterra which had focused on cheese only.

The Auckland-based processor commanded exclusive use of the red Bega trademark on cheese products it made in Australia under license.

Earlier this year the Supreme Court had to rule on the licensing rights held by the large dairy companies. Picture: Dannika Bonser

The Bega labelling agreement was originally signed with the now-defunct Bonlac prior to Fonterra buying the farmer co-operative for $85 million 16 years ago.

United Dairyfarmers of Victoria president Paul Mumford said Fonterra’s suppliers had a range of options to examine but a move towards greater Australian control was welcome.

“There have been suggestions for some time that Fonterra was looking to either exit Australia or at least pull back on the way it operates here. The announcement last month confirmed that,” Mr Mumford said.

“Any arrangement where the supplier has greater say, greater control, is obviously a good thing for the sector. What form that takes is something that only Fonterra and its suppliers can determine but what’s been said so far has been positive.”

The move by Fonterra’s NZ management towards a more localised model in Australia is part of a wider trend from the co-operative. It also announced it would seek to divest from its Chilean brand Soprole and subsidiary Prolesur last month.

Fonterra Australia managing director Rene Dedoncker has said the review would not countenance severing its consumer business — which handles household brands like Western Star and Perfect Italiano, from its manufacturing and ingredients operations.

“We’re aiming for a pre-Christmas decision at this point on which option we go with,” he said. “Post-Christmas and into the next calendar year, we do the hard work and at some point next year we’ll be in the position to go live (with the announcement), so that’s the sequence.