Taking Stock 30 October 2025

Fraser Hunter writes:

THIS morning, Fonterra’s shareholders will cast their votes on whether to sell the co-operative’s consumer and brands division, home to Mainland, Anchor, Chesdale, and a number of other Kiwi household names.

The deal looks straightforward enough: a sale to France’s Lactalis Group for as much as $4.2 billion, paving the way for a $3.2 billion capital return to farmers and Fonterra Shareholders’ Fund (FSF) unitholders. With strong board backing, positive farmer sentiment, and only a simple majority required (50%), it should pass comfortably.

Despite only needing a 50% approval, this is by no means a minor transaction. It marks the end of Fonterra’s 20-year attempt to build global consumer brands, and a decisive shift to becoming solely a business-to-business ingredient manufacturer. It’s a model Fonterra and its stakeholders know well, but one that leaves it more exposed to commodity cycles and global demand swings.

The deal comes at a time when dairy prices are buoyant, farm confidence is rebuilding, and the Government is counting on export growth to jolt the economy out of its current funk. A $3 billion cash injection into rural balance sheets, or roughly 1% percent of GDP, will provide a much-needed lift in regional spending and stimulus, without the Reserve Bank needing to lift a finger.

When Fonterra listed in 2012, it offered investors exposure to one of the few industries where New Zealand holds true global scale. The first decade tested that promise, with missed targets, over-extended acquisitions, and a painful strategy reset. Since 2019, the co-operative has been leaner, more disciplined and, finally, a standout on the NZX. FSF units have more than doubled in recent years, well exceeding the $2-per-unit windfall now on offer.

Supporters see this deal as a natural next step and a chance to focus on the core ingredient and food service business where Fonterra has genuine global advantage. Sceptics, meanwhile, see a familiar New Zealand story: a strong domestic brand portfolio sold offshore, only to thrive under new ownership.

The nature of the buyer adds weight to the latter argument. Lactalis is a family-owned French dairy giant that has spent nine decades implementing a very similar strategy to what Fonterra originally set out to achieve. It has spent generations climbing the value chain, reducing commodity exposure and building a global stable of profitable, high-margin brands, which will soon include some of Australasia’s best known.

As Fonterra and the independent valuers highlight, by all accounts the sale price seems full, nearly a billion dollars above what the market expected Fonterra to achieve, and Lactalis, for its part, appeared happy to outbid others in a major acquisition at a time commodity prices were thriving.

Regardless of the outcome, the process underscores the initial concerns of the Units as an investment. The interests of the farmers will always take precedence over the unitholders, who have no say in the outcome or future direction of the co-operative.

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Fonterra’s story began in 2001, born from the merger of New Zealand’s largest dairy co-operatives. The goal was simple but ambitious: combine the milk pool, build scale, and market New Zealand dairy to the world.

Through the 2000s, that vision expanded fast. Fonterra decided it didn’t just want to export ingredients; it wanted to own supermarket shelves with its brands the faces of a global consumer push. It was bold, and for a time, profitable. But by the mid-2010s, the weight of ambition had become a drag - expensive offshore ventures, volatile returns, and write-downs that eroded the trust of its shareholders.

In 2012 the Fonterra Shareholders’ Fund (FSF) listed on the NZX, giving the public a chance to invest in New Zealand’s biggest exporter. The timing was perfect from an offshore marketing perspective, with New Zealand one of the few bright developed economies emerging from the GFC.

But the first decade of listing was rough. Global ventures faltered, profits disappointed, and the share price drifted from its $6.10 IPO reference price to a low of $2.75 in 2022, when farmer frustration forced a reckoning.

Over that time volume also cratered, with trading in the FSF units falling from more than 250 million units in the first year of listing, to just over 16 million units in 2024. 

Under chair Peter McBride and CEO Miles Hurrell, Fonterra began unwinding its global sprawl, selling offshore farms, joint ventures, and consumer units that never delivered.

The bold strategy that once aimed to make Fonterra a world dairy brand is now closing its final chapter with the Lactalis sale, with the new era built on simplicity, discipline, and realism.

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Fonterra’s consumer and value-added divisions include high-margin dairy products such as yoghurts, specialty cheeses, spreads and nutritional powders, distributed through supermarkets, cafés and food-service channels across New Zealand, Australia and Southeast Asia. The network connects farm-gate milk supply to end consumers via 17 processing sites and regional export hubs, making it the most globally integrated part of the co-operative.

The buyer, France’s Lactalis Group, is a family-owned dairy company with more than 270 plants worldwide and brands including President, Parmalat and Galbani. The $4.22 billion deal gives Lactalis an instant platform in Asia-Pacific, a region where its presence has been limited.

The assets include three plants in New Zealand, nine in Australia and five in Southeast Asia, which account for roughly 15% of Fonterra’s milk solids. Two supply agreements will keep the companies linked: a 10-year milk contract for up to 350 million litres annually and a three-year ingredients trade arrangement.

Independent advisers acting on behalf of the farmers called the sale price “full,” valuing it at roughly ten times EBITDA, a clear premium to comparable dairy deals.

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Fonterra will return $3.2 billion to farmers and unitholders once the Lactalis sale completes, likely mid next year, one of the largest corporate cash returns in New Zealand’s history, worth about $2.00 per share or unit, tax-free.

For rural economies, the impact will be immediate. A $3 billion injection into farmer accounts is not common and is a one-off, but will flow through farm spending and local suppliers, fix balance sheets, and undoubtedly fund some new ute and boat upgrades. For investors, it’s a material return in cash, delivered without a tax drag.

The return will come through buying back and cancelling shares and units, reducing Fonterra’s capital base to match the scale of what’s being sold. Farmer shareholders will have about one in five shares retired and receive $2 for each, while holders of Fonterra Shareholders’ Fund units will have theirs repurchased and cancelled at the same rate.

Despite the payout, Fonterra’s balance sheet will be left in a strong position, with debt expected to stay below two times EBITDA. While that may seem conservative, Fonterra points out that it is carrying debt which is highly seasonal, fluctuating as working capital requirements require. It also allows the co-operative to invest and grow the remaining business to successfully implement its refined strategy.

The trade-off is scale. With fewer shares and less revenue, Fonterra will be a smaller business, but potentially one with sharper focus and higher efficiency.

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Fonterra has been refreshingly upfront about one of the key reasons for the sale. It no longer believes it is the best owner of its consumer brands. Very few companies manage to successfully operate across the full value chain from farm to supermarket, and most find their strength either in production or in consumer marketing. To succeed in both requires not just scale but deep marketing expertise, time and capital, resources that Fonterra’s farmer-owners have been reluctant to commit to after years of uneven returns.

Lactalis, by contrast, is built for branded dairy. As one of the world’s largest privately owned food companies, it has spent decades building networks, brands and negotiating power, creating an enduring consumer franchise. The French group has grown through steady, long-term investment. This acquisition provides scale and access to high-value markets in Australasia and South-east Asia where it previously had a limited presence.

For Fonterra, the move is about clarity. The co-operative wants to focus on what it does best: collecting and processing milk, developing high-value ingredients, and serving food-service customers around the world. It also unlocks $3 billion of capital from businesses that, while profitable, were not delivering the returns or growth potential that justify their complexity.

The rationale rests on three pillars. First, focus: concentrating on ingredients and food service rather than competing for shelf space. Second, discipline: freeing up capital to strengthen the balance sheet and reinvest in efficiency and innovation. Third, simplicity: reducing exposure to volatile consumer markets and their marketing costs.

Independent adviser Northington Partners supports the logic, describing the sale price as full, at around ten times EBITDA, one of the richer valuations seen in global dairy. The risk, however, is that once the brands are gone, so too is Fonterra’s foothold in Asia’s fast-growing consumer markets. The co-operative is betting that being narrower and deeper will ultimately pay off better than being, as the Chairman described it, a mile wide and a few inches deep.

There is also a measure of humility in this decision. Fonterra once set out to build global dairy brands, but it is now acknowledging the limits of its co-operative model. The move signals a shift from ambition to realism. The question is whether sharper focus and operational depth can compensate for what is being surrendered in diversification and growth.

The $3.2 billion payout will certainly please shareholders, yet it is a one-off. Once the cash is distributed, it cannot be reversed. The chairman noted that the capital return was well considered, given that farmers are unlikely to want to put that money back. From that point on, Fonterra must prove that a smaller, simpler business can still deliver rising dividends and steady value.

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It is easy to say the sale follows the familiar New Zealand pattern of selling off growth options, but it appears to have been done with a great amount of control and discipline, along with some $300m of costs related to the transaction. It was not a forced sale, although years of uneven performance and pressure to simplify left the co-operative with limited options. To its credit, Fonterra managed the process carefully and appears to have achieved a strong price and result for its farmer-owners based on the information provided.

Lactalis, meanwhile, comes to the table from a position of strength. It is a stable, privately held global operator expanding into a region where it has long sought scale and brand reach.

Fonterra has chosen focus; Lactalis has chosen growth. Both approaches make sense, but it is difficult to see Fonterra holding the stronger hand given Lactalis’s pedigree, stability, and long-term record.

Fonterra’s logic is grounded in the numbers, but its long-term success will depend on execution, extracting more value from its ingredients and food-service platforms, and maintaining a constructive relationship with the buyer that now owns the brands it once built.

For unitholders, the payout offers a tangible return after a decade of uneven performance. For New Zealand, it is another example of a major company reshaping itself for stability rather than ambition. Whether that proves wise or simply cautious will be judged in time, as the co-operative trades its old promise of growth for the discipline of focus.

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Travel

12 November – Levin – David Colman

13 November – Whanganui – David Colman

14 November – New Plymouth – David Colman

20 November – Havelock North – Edward Lee

Fraser Hunter

Chris Lee & Partners Ltd