Fonterra is beginning to install new milk vat monitoring systems over the next couple of years.
When Fonterra said it urgently needed to reduce debt by $800 million this year, hard decisions were inevitable: reducing debt to shore up the balance sheet would be achieved by lowering costs and selling assets.
The co-op flagged a review of the disastrous Beingmate investment in China quite early and no one was surprised or upset. After all, Fonterra has had to write down $439 million on its investment in the Chinese infant formula company. In 2015, Fonterra bought an 18.8% stake in Beingmate for about $750m. Its share price has since plummeted, and Fonterra’s stake is now worth at best $400 million less than it paid for it.
Selling its stake in Beingmate will be widely welcomed.
However, someone last month leaked to Australian media that Tip Top Ice Cream — a Fonterra subsidiary and one of NZ’s truly iconic brands — was on the chopping block. The co-op confirmed this last week. The reaction on social media has been swift and negative, and a petition is already underway to try to prevent the sale.
Should Fonterra then sell the family jewels? Tip Top is reportedly valued at about $500 million, operating in a very competitive market.
Tip Top makes about 41 million litres of ice cream a year, and Fonterra Brands (Tip Top) Ltd has some 400 employees. Tip Top products are exported to Japan, Taiwan, Malaysia, Australia, Indonesia and the Pacific Islands. And as a top NZ brand, Tip Top has helped Fonterra cultivate its relationship with the public.
Fonterra is looking “at a range of options” for Tip Top. It wants to see it remain a New Zealand-based business and this is being factored into options.
While performing well, Tip Top is the co-op’s only ice cream business and has reached maturity as an investment for the co-op, it says. To take it to its next phase successfully will require a level of investment beyond what Fonterra is willing to make.
It’s clear that Fonterra doesn’t have the capital Tip Top requires. The co-op’s future returns from Tip Top will be hindered by its inability to invest in new technology. So it might well be the right decision to offload the business and use the money to shore up the balance sheet, ensuring better returns to shareholders in years to come.