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Opinion: Oh, Fonterra! What to do with your mountain of cash

By Andrew Macdonald of NZPA

Friday 15th April 2005

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Fonterra has a problem other companies wouldn't mind - it lost a battle but won $A210 ($NZ226.53) million.

However, the real problem is how to spend that mountain of cash.

The New Zealand dairy behemoth has long seen Australia as its happy hunting ground for expansion, but now the pressure's on.

Filipino interloper San Miguel this week grabbed the National Foods jewels for $2.05 billion, leaving Fonterra - unwilling to stump up with a winning bid - out in the cold.

The question for Fonterra is where to now?

Chief executive Andrew Ferrier reckons there's opportunities all over the world, which is true, but also not so true.

Realistically, any Fonterra acquisition will be governed by its plans for expansion in its domestic market, which includes Australia.

Ferrier has already flagged Australia as a "logical and sound business direction" for consumer goods growth, but also cautioned that the firm would not destroy value for its farmers by paying over the odds.

Australia is an ideal springboard into the potentially lucrative Chinese and broader Asian market for dairy consumer goods.

On the upside, Fonterra has a quarter of a billion dollars in cold, hard cash after selling its 19% National Foods stake, plus dividends - to use for any expansion.

On the downside, a would-be rival has emerged in the form of Manila-based brewer and food group San Miguel.

There's also the lack of a suitable Australia takeover target, or at least joint venture partner, on the immediate horizon.

The three main players in Australia's liquid milks sector are National Foods (43%), followed by Dairy Farmers (22%) and Parmalat Australia (18%).

Analysts in New Zealand and Australia are split in their opinions.

Most say New South Wales co-operative Dairy Farmers will likely be top of Fonterra's shopping list.

Dairy Farmers is Australia's largest fresh dairy business. It is set to demutualise in the next two or three years and list on the Australian sharemarket, allowing Fonterra to snap up a stake.

By contrast, uncertainty surrounds the potential sale of assets belonging to Parmalat Australia, a unit of beleaguered Italian dairy firm Parmalat.

Commsec consumer staple analyst Pierre Grobler said a sale of Queensland-based Parmalat Australia's assets - including Pauls, PhysiCAL and Ice Break - was unlikely.

"I don't think that will happen... they (Parmalat) would have done that probably about 18 months ago as Parmalat tried to get itself in order," the Sydney-based Grobler said.

This doesn't rest well with Shaw Stockbroking head of industrial research Scott Marshall.

"The Australian (of Parmalat) operation keeps saying it's not for sale but it's really up to the Italian administrators as to what happens - so it's a possibility," Shaw said.

Moreover, Victorian co-operative Murray Goulburn, which teamed up with National Foods in 2001 in a failed bid to buy the assets of Bonlac, could also be a target for Fonterra.

"They (Murray-Goulburn) are still a co-op but are more advanced than Dairy Farmers and if Fonterra can't buy them, then maybe they could set up an operational alliance and acquire them in two years time," Shaw said.

Add to this the ghost of New Zealand Dairy Foods' past: spun-off by Fonterra in 2002 after a Commerce Commission ruling and bought by kiwi billionaire Graeme Hart.

Hart has put NZDF on the block with a rumoured price tag of $1 billion. San Miguel is sniffing around NZDF and has registered on the Commerce Commission's radar.

But the consensus is that San Miguel will bed down its National Foods purchase before making an advance on NZDF, which buys its milk at cost from Fonterra.

Should that happen, San Miguel could be seen as a threat to Fonterra's foundation: the 12,200 New Zealand dairy farmers who supply the Hamilton-based firm.

So, Fonterra is left flush with cash for capital growth, with a self-declared bent for Australian expansion, opportunities in the wind, and San Miguel lurking in the wings.

One analyst spoken to by NZPA said Fonterra would not be perturbed by the San Miguel's latest acquisition, and in walking away from National Foods itself showed it was loathe to expand at any cost.

Indeed, it was a move that had curried favour with its suppliers, he said.

But he also said Fonterra's next move and its timing would be even more interesting.

"Just how concerned are they by San Miguel?" he said.

And that's the crux of the matter.

San Miguel may not be a dairy industry expert, but it has just bought - in National Foods - some of the best brains in the business.

It's clearly in for the long haul and may yet make a tilt towards Dairy Farmers when it lists, a move unlikely to pose regulatory issues given the level of competition in the aussie market.

Brisbane dairy analyst Steven Spencer said the Australian dairy industry was now eyeing San Miguel with nervous anxiety.

"If they drive it (National Foods) hard, it will have to be brutal," he told National Business Review, adding Fonterra had missed an opportunity.

"National Foods was the natural step for Fonterra but the next cab on the rank is not nearly as attractive," he told the magazine.

Business commentator Rod Oram said Fonterra should have been prepared to pay more for National Foods because it offered a bigger strategic opportunity to them.

"Therefore, Fonterra's management, in an apparent inability to understand that value and to make that case to its shareholders," Oram told National Radio.

"The far more important point is what's it going to spend the money on?"

Dairy Farmers of New Zealand (DFNZ) representatives spoken to by NZPA said Fonterra should be congratulated by for walking away from the National Foods deal.

DFNZ vice chairman Eliot Cooper said most dairy farmers were against the National Foods deal - because of the amount of debt it would involve - but not against growth by expansion.

"I'd be bloody surprised if Fonterra still had that money ($A250m) by the time of the next payout," he said.

So Fonterra has the money. The opportunities are likely to come.

Whether it has the vision, expertise, patience and farmer backing to exectute a sound expansion into Australia and these the world, is yet to be seen.

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