Fonterra accepts farmers may have mixed feelings about selling the Mainland consumer business to Frances Lactalis for $4.22 billion.
The co-op was targeting a capital return of $2 per share for farmer shareholders from the Mainland sale, which amounted to $3.2b.
The sale would be subject to approval from farmer shareholders, regulatory approvals and businesses being separated from Fonterra.
A farmer shareholder vote is due to take place at a special meeting on October 30.
Should the sale pass, regulatory approvals were expected to be completed within the first half of next year for the sale to proceed.
This would see Lactalis buying the consumer business — except for Greater China — as well as the co-op’s Oceania and Sri Lanka integrated businesses, and the Middle East and Africa foodservice business.
The deal includes long-term agreements for Fonterra supplying milk, ingredients and other products.
Federated Farmers Dairy chairman Karl Dean said he was reluctant to second-guess the result, but there had been some concerns by farmers.
“Cutting across, there is definitely two camps with one camp who see it as great way to free up some capital to pay down some debt and there is the other side who don’t want to lose that nostalgia or New Zealand-owned product, but the vote will be very interesting to see.”
Chief executive Miles Hurrell said farmer meetings would be held next week to explain the sale.
“Farmers will be grappling with their head and heart. Economically, hopefully we have shown that a little bit today where the co-op has historically and will continue to generate value going forward, but at the same time these brands have been built up over many, many years.
“There is an acknowledgement that they are important brands to New Zealanders and important to our farmer owners.”
He said Fonterra would be seeking a strong mandate at the special meeting.
The co-op had taken a dual-track process, pursuing both a trade sale and initial public offering (IPO) for the consumer businesses known as the Mainland Group.
Management revealed they would likely have gone with a dual listing on NZX and ASX if it had gone ahead.
Mr Hurrell said the process had generated strong competition and ultimately landed Lactalis.
“The IPO was certainly a consideration right to the very end, but important for us was to see would one of these trade buyers see synergies through taking on some of these brands and complementing with their own brands and we have seen that with Lactalis.
“So while you would never know how an IPO would land because we never got to that final stage we feel very confident in what the trade sale is and now have an important customer going forward.”
Chief financial officer Andrew Murray said there was a lot of appetite for the offering, both in New Zealand and Australia from investors such as big superannuation funds.
Mr Hurrell said the co-op was targeting earnings to return to current levels within three years, offsetting the earnings impact of selling the Mainland Groups consumer and associated businesses.
Fonterra is targeting a tax-free return of $3.2b from the $4.22b sale of Mainland.
About $700m will be retained to support earnings growth, with a return on capital at the upper end of a 10%-12% range expected following the sale — above the current level.
About 4300 employees connected to the Mainland business were expected to go across to Lactalis.
Mr Hurrell said the remaining workforce would support the business with no plans for a global restructuring.
tim.cronshaw@odt.co.nz
