$6-700m capital return ‘realistic’
Analyst expects substantial payout from Fonterra’s $1b Soprole unit sale
I would expect what they got for this will allow them to do a substantial amount of the capital return they would have earmarked.
Arie Dekker, head of institutional research, Jarden
Dairy company Fonterra could “realistically” return $600 million to $700m capital to shareholders and unitholders after the sale of its Chile business, says Jarden head of institutional research Arie Dekker.
He said the $1.05 billion Fonterra will receive on the sale of the Soprole business to South American dairy group Gloria Foods was “a good, fair price” and in line with his expectation given Soprole’s latest operating earnings of around $100m.
“They will retire some debt . . . but I would expect what they got for this will allow them to do a substantial amount of the capital return they would have earmarked,” said Dekker.
“They talked about (returning) $1b over time associated with (the divestment of) Chile and Australia, but Australia is on hold or being retained so it’s not going to be $1b.
“But I would have thought $600m to $700m is probably realistic.”
Fonterra in a statement last week announcing the conditional sale of Soprole said it remained “committed to targeting a significant capital return to our shareholders and unitholders.
“The Fonterra board intends to make a final decision on the amount and timing of any capital return once the sale agreement this unconditional, cash proceeds are received in New Zealand and having regard to other relevant factors including Fonterra’s debt and earnings outlook at such time.”
In September last year the big farmer-owned co-operative, New Zealand’s biggest business, laid out its financial targets by 2030. They included a 40-50 per cent improvement in operating profit, a $1 billion spend on moving to higher-value products and a $1b return to farmers from asset sales.
It was considering at the time an initial public offer (IPO) for its Australian business, in which it would retain a stake. The other asset for divestment was Soprole.
The company said at the time the intention was to return about $1b to shareholders by FY24, through planned divestments and improved earnings.
It has since decided to retain the Australian business.
Observers have noted the company has since not mentioned the $1b again, but Dekker said he viewed that goal announcement positively.
“In setting up the expectation, they’ve put discipline on themselves not to retain that money in the business.
“My view is reducing the capital base of the business is a good thing so returning capital is a good thing. By putting out a number they are essentially going to be held to account on that. That’s a good thing.
“The expectation is they will deliver a substantial amount of that off the Chile sale. They are less likely to return the full billion dollars as long as they retain that decision to hold on to Australia.”
Dekker said he would have liked Fonterra to press on with the partial exit from Australia.
“But I guess market conditions have changed since then (the IPO potential).
“I would like to see them relook at the Australian situation at some stage.”
The sale process for Soprole formally started in April, following the launch of Fonterra’s strategy to 2030.
Chief executive Miles Hurrell said a key pillar of the strategy was to focus on New Zealand milk.
“Soprole is a very good business but does not rely on New Zealand milk or expertise.”
Fonterra and buyer Gloria Foods, a prominent consumer dairy market player, had a long-standing commercial relationship in South America, Hurrell said.
The sale is subject to a number of conditions. The material conditions are receipt of regulatory approvals, including from the competition authority in Chile, and commencement of an irrevocable public tender offer process in Chile for the outstanding shares in Soprole not already owned by Fonterra.
Satisfaction of conditions is expected to take around six months.