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Fonterra abandons merger with Nestle in Chile


Wednesday 6th April 2011

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Fonterra has baled out of a proposed merger of its 99.8 percent-owned Chilean subsidiary Soprole, with Nestle, the world's largest food group.

Fonterra said today that its Chilean subsidiary, Soprole, "had withdrawn a proposal to merge its business with Nestle Chile's liquid and chilled dairy business".

Fonterra chief executive Andrew Ferrier said Soprole and Nestle Chile today agreed to withdraw the application.

"The parent companies Nestle S.A. and Fonterra assessed the conditions to continue with the application were not appropriate," he said.

But local media in Chile said that the proposal for Fonterra and Nestle to create a 50:50 joint venture DPA Chile had generated considerable resistance from Chilean dairy farmers and politicians. The resistance pivoted on concerns that the merger would hurt domestic milk consumers, damage competition among companies in Chile's dairy sector, and especially affect dairy farmers.

At home in New Zealand, Fonterra is facing a similar controversy over milk prices in NZ supermarkets, and criticisms of its dominance of milkflows in this country, with the Commerce Commission looking into whether the issues require a full-blown investigation.

In Chile, a powerful grouping of a dozen senators to the agriculture committee of Chile's Senate of recently presented a draft agreement to categorically reject the merger.

The text, which had not yet been submitted for consideration by the Senate, argued that the merger would cause serious harm to domestic, damage competition among companies in the sector and negatively affect dairy farmers.

Chile's Agriculture Minister, Jose Antonio Galilea, earlier this year criticised the proposed merger, and said that an "excessive concentration of certain industries" would naturally end up affecting producers. Mr Antonio Galilea noted issues related to unfair competition and transparency.

Chile's National Economic Prosecutor, Felipe Irarrazabal, said the merger "in the opinion of this office" was not positive and mitigation measures were not sufficient to offset the risks involved.

The president of the National Federation of Milk Producers in Chile, Dieter Konow, warned that a company such as Soprole which controlled more than about 60 percent of the market "is free to set the prices for both sales and purchases of dairy products (...) it is not good to a social market economy".

Fonterra's Soprole arm and Nestle's Chilean operation applied in late November to the Court of Free Competition in Chile (TDLC) for a ruling the merger, which they claimed sought to increase milk consumption in Chile by promoting and expanding the product categories the two companies sold.

In much of Latin America, Fonterra has been managing its investments through Dairy Partners America (DPA) joint venture with Nestle, which operated 13 manufacturing sites across Brazil, Argentina, Venezuela, Colombia and Ecuador, separately to its own big South American dairy company, Soprole, in Chile.

Mr Ferrier said Soprole would now focus on continuing to grow its consumer business in Chile.

"Soprole already has a very strong position in the Chile market and has been posting strong growth in recent years. The team is now focused on building on that strong foundation."

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