The dairy giant’s decision to sell its consumer business to Lactalis marks a pivotal moment – but is it time for investors to follow suit with their shareholdings?
Fonterra’s announcement that it will sell its consumer and associated businesses to French dairy giant Lactalis for NZ$3.845 billion represents one of the most significant structural changes in the cooperative’s history. The deal, which includes beloved New Zealand brands like Anchor and Mainland, has sent ripples through both farming communities and investment circles. As shareholders await the October vote on this transaction, it’s worth examining whether this strategic pivot signals opportunity or concern for those holding Fonterra shares.
The Deal That Changes Everything
Fonterra will sell its global consumer brands, including Anchor and Mainland, and associated businesses to French dairy giant Lactalis for $3.845 billion, with the transaction potentially reaching $4.22 billion if additional Australian licences are included. This isn’t just another corporate restructuring – it’s a fundamental reimagining of what Fonterra wants to be.
The sale encompasses the company’s global consumer business (excluding Greater China), integrated foodservice and ingredients operations across Oceania and Sri Lanka, and Middle East and Africa foodservice divisions. Importantly, Fonterra will continue to supply milk and other products to the divested businesses, meaning New Zealand farmers’ milk would still be found in dairy brands including Anchor and Mainland.
The Bull Case: Strategic Focus Pays Dividends
There’s a compelling argument that this divestment represents shrewd strategic thinking rather than corporate retreat.
Financial Performance Justifies the Move
The numbers tell a story of a business finding its competitive edge. Fonterra’s ingredients business (up NZ $276m) was the largest profit driver for the group, with higher margins more than offsetting a decline in sales volumes. Meanwhile, the consumer business, despite strong recent performance, has historically been a laggard.
CEO Miles Hurrell has been clear about the strategic rationale: “By focusing on our core strengths and the sales channels that deliver the highest returns, we have the confidence to target an average Return on Capital of 10-12%, which is above our 5-year average”. This suggests management believes the capital can be deployed more effectively in higher-return ingredients and foodservice operations.
Capital Return Sweetens the Deal
Perhaps most importantly for shareholders, Fonterra targets a tax free capital return of $2 dollars per share, which was approximately $3.2 billion, following completion of the sale. This represents immediate value crystallization for farmer-shareholders who have weathered years of inconsistent returns.
Market Validation and Professional Analysis
The sale price exceeded market expectations significantly. Forsyth Barr senior analyst Matt Montgomerie said Fonterra had achieved a good price – well over market expectations of around $3b, stating “We view this as a very good outcome for what has been a perennial under-performing business for many years”.
Montgomerie noted the sale was a “solid outcome” for Fonterra, highlighting that “the sale includes long-term agreements for Fonterra to supply milk, ingredients, and other products to the divested business” – understood to be 10 years, with Lactalis becoming one of Fonterra’s largest customers.
Forsyth Barr analysts believe the sale price “was ahead of our expectations” and say Fonterra will be “a much better business without Mainland Group”
Case: The Bearelling the Family Silver
However, there are legitimate concerns about whether Fonterra is making the right long-term decision.
Giving Up Consumer Connection
By divesting consumer brands, Fonterra is essentially retreating from direct relationships with end consumers – relationships that provide valuable market intelligence and pricing power. The consumer business, while historically underperforming, showed strong recent growth with operating profit growing by 103% in FY25 Q3.
Despite this recent strong performance, Forsyth Barr analysts have noted they “did not think Fonterra was the best owner of the brands and businesses it was trying to sell”, citing that “this has been evident for time with earnings/returns proving to be volatile and lacklustre”. They attributed challenges to “the inherent difficulties managing three different milk pools and what appears to be an elevated cost base”.
Concentration Risk
The divestment leaves Fonterra more concentrated in B2B ingredients and foodservice markets, which can be more volatile and commodity-like than branded consumer products. While margins may be higher currently, this exposes the cooperative to greater cyclical risk.
Strategic Optionality
Selling these businesses eliminates future strategic options. Consumer brands, once developed and sold, are difficult to rebuild or reacquire, particularly at reasonable prices.
Professional Investment Advisory Perspective
The transaction has drawn significant attention from New Zealand’s investment advisory community. Fonterra received financial advice from three leading firms: Jarden, Craigs Investment Partners, and JP Morgan, reflecting the complexity and importance of this strategic decision.
Craigs Investment Partners, one of New Zealand’s largest investment advisory firms, was intimately involved in advising on the transaction. Notably, Craigs has deep expertise in Fonterra, with team members including Peter Wright who serves as the Fonterra RVP (market maker in FCG securities), and Greg Easton who previously worked in Corporate Finance roles at Fonterra gaining invaluable experience in company valuation and financial reporting.
Forsyth Barr analysts have initiated coverage on Fonterra’s units with a “neutral” rating, reflecting what they describe as a “balanced” view. Their analysis suggested concerns that a Mainland sale might not command a valuation above what was already factored into the share price, particularly given their analysis of Australia’s “underwhelming return on capital and cash flow generation over the past decade”.
However, the final sale price of $4.22 billion (including Bega licences) exceeded these expectations, validating management’s decision to pursue the sale rather than an IPO.
The Capital Structure Conundrum
Understanding Fonterra’s recent capital structure changes is crucial for investment decisions. The Co-operative transitioned to Flexible Shareholding structure on 28 March 2023 to make it easier for new farmers to join the Co-op and for existing farmers to remain by allowing greater flexibility in the level of investment required.
However, this flexibility has come with a cost. The price of Fonterra shares is now 35 per cent below the price of fund units, relative to an average discount of 17 per cent since May 2021. This growing discount reflects the illiquidity of the farmer-only share market compared to the publicly traded Fonterra Shareholders’ Fund units.
Forsyth Barr’s earlier analysis reflected concerns about this structural issue, noting their “balanced view reflected a lack of conviction” about valuations, particularly given the cooperative’s capital structure constraints.
Is It Time to Trim Your Holdings?
For investors holding excess Fonterra shares, the current environment presents both opportunity and risk. The professional investment advisory consensus suggests this sale represents a strategic positive for the cooperative’s long-term prospects.
The Case for Selling
- Immediate Capital Access: The pending $2 per share return provides immediate liquidity, which could be redeployed elsewhere
- Valuation Concerns: The significant discount between farmer shares and fund units suggests the restricted market is struggling to find fair value
- Strategic Uncertainty: While the ingredients focus makes sense, execution risk remains high, and the cooperative is essentially betting its future on B2B markets
- Liquidity Constraints: The co-op is capping the shareholders’ fund and moving to a farmer-only market, which means that the farmers will set the prices at which they buy and sell shares without the traded prices being influenced by external investors
- Professional Validation: Leading investment advisors including Craigs Investment Partners and others were involved in structuring this transaction, suggesting the strategic rationale is sound
The Case for Holding
- Improved Returns: Management’s confidence in achieving 10-12% return on capital suggests better shareholder returns ahead
- Market Position: Fonterra remains a dominant global player in dairy ingredients with significant competitive advantages
- Farmgate Milk Price: The forecast Farmgate Milk Price for the 2025/26 season of $10.00 per kgMS sits within a wide forecast range of $8.00-$11.00 per kgMS, providing good returns to farmer-shareholders
The Bottom Line
Fonterra’s divestment strategy represents a calculated bet that focus and specialization will drive superior returns. The immediate capital return provides tangible value, while the streamlined business model should theoretically generate higher margins.
However, the growing share price discount and reduced strategic optionality are genuine concerns. For investors with excess holdings beyond their supply requirements, this may be an opportune time to reduce exposure while capturing the capital return and avoiding potential future liquidity challenges in the farmer-only market.
The October shareholder vote will be crucial. If approved, this transaction will define Fonterra’s trajectory for the next decade. Whether that trajectory leads to prosperity or presents new challenges remains to be seen, but one thing is certain – Fonterra will emerge as a fundamentally different company, focused squarely on being the world’s premier B2B dairy ingredients player.
For farmers and investors alike, the message is clear: evaluate your holdings carefully, consider your risk tolerance, and prepare for a new chapter in New Zealand’s dairy story.
This analysis is based on publicly available information and should not be considered personal financial advice. Investors should consult with qualified financial advisors before making investment decisions.