Sharechat Logo

Fonterra to hit debt reduction target from announced asset sales

Wednesday 20th March 2019

Text too small?

Fonterra Cooperative Group expects to slice $800 million from its debt ledger through the sale of assets already signalled for the block. 

The world's biggest dairy exporter is strengthening its balance sheet as part of its wider strategic review. That's included the divestment of a range of assets no longer deemed central to the cooperative's future, the latest of which was a 50 percent stake in DFE Pharma - a joint venture with FrieslandCampina which supplies bulking agents, or excipients, in medicines including tablets and inhalers. 

Fonterra has already announced plans to sell ice-cream maker Tip Top, with investment bank First NZ Capital receiving final bids earlier this month. It's also considering its options for its 18.8 percent stake in Beingmate Baby & Child Food. 

The dairy processor has previously said the asset sales were key to shoring up the balance sheet, and chief financial officer Marc Rivers told reporters in Auckland today that the named asset sales will get Fonterra to the debt reduction target. 

As a result of cutting its debt, Fonterra wants to reduce its gearing ratio - the level of debt relative to debt plus equity - to 40-45 percent from its current level of 52.5 percent. 

"To achieve that we have to be successful in the asset sales and the divestments," Rivers said. "We're very confident we're well on track with each of those - achieving those will get the debt reduction down and get us to achieve that 40-45 percent target."

Net debt was $7.35 billion as at Jan. 31, up from $7.06 billion a year earlier. 

Earlier this month Fitch Ratings put its 'A' credit rating for Fonterra on a negative outlook, meaning it could be downgraded in the next two years if the milk processor is unable to successfully grapple with the structural issues it faces. 

Fonterra's future gearing ratio will be a matter for the wider strategic review, which the company is describing as a fundamental change in direction. 

Chair John Monaghan said the cooperative's strategy will focus on sustainability and provenance through the value chain, putting a priority on extracting the greatest value for New Zealand milk supply. 

"We believe there's a premium to be earned from products backed by our cooperative heritage," he said. 

Fonterra will provide more details on the review at the third-quarter update and announce the full strategy at the annual result in August. 

In January, Fonterra took back control of the Darnum factory in Victoria that was part of the Beingmate joint venture. The transaction price was $126 million, of which $64 million owed to Fonterra was settled against the price, leaving a further $62 million outstanding to Beingmate. 

Rivers said that will be satisfied by the supply arrangements the two companies have in place, and he noted the increased Beingmate share price as reflecting the interest in the Chinese company. 

Fonterra also announced the sale of its 60 percent stake in Venezuelan consumer joint venture, Corporacion Inlaca, to international food business Mirona, for $16 million. The transaction will fall in the second half and translate to a non-cash $126 million loss in the accounts as the hyperinflation and devaluation of Venezuela's currency are recognised.

Rivers said Venezuela had been a drag for the wider Latin American segment, which reported a $3 million loss before interest and tax, compared to $30 million of earnings a year earlier. 

"The key for us in doing this was to exit responsibly, so finding a buyer who can continue the operation was important to us," he said.

Fonterra returned to profit in the first half, generating a profit attributable to shareholders of $76 million in the six months ended Jan. 31, compared to a loss of $354 million a year earlier. The year-earlier period included the $196 million bill paid to Danone over the 2013 false botulism scare and a $405 million impairment charge on the Beingmate investment. 

The Danone payment was the outcome of an arbitration ruling in Singapore. However, Danone still has proceedings lodged in the High Court in New Zealand. Fonterra noted the local proceedings - which were stayed to allow for the arbitration - as a contingent liability saying it was unclear whether Danone will pursue the dispute. 

"Due to the uncertainty regarding whether Danone will seek to re-initiate these proceedings, and the nature and scope of these potential proceedings in light of the arbitration findings and award, no amount has been recognised in relation to these proceedings," the firm says in notes to the accounts. 

(BusinessDesk)

NOTE: please be advised to read full articles from Business Desk Website, you will have to pay a subscription fee on their website.



  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ dollar holds gains on improved dairy, bank capital outlook
MARKET CLOSE: NZ shares gain; banks rally on Reserve Bank capital decision
NZ dollar rises; bank capital rules less harsh than expected
RBNZ relaxes capital requirements, allows preference shares, extends phase-in
NZ dollar extends gain amid mixed US data, possible trade progress
MARKET CLOSE: NZ shares dip on eve of major regulatory decisions
NZ dollar sees off global headwinds, holds above 65 US cents
NZ dollar holds above 65 US cents; dairy auction prices mixed
Dairy index falls on weaker butter, milk fat demand
MARKET CLOSE: NZ shares join global decline; US tariff move weighs on exporters

IRG See IRG research reports