Fonterra is trying to reduce debt and to put less emphasis on overseas ventures, including its former expansion in China.
Selling On An Up Note
Inner Mongolia Natural Dairy Co., Ltd., a subsidiary of China Youran Dairy Group Ltd., has agreed to purchase Fonterra's two farming-hubs in Ying and Yutian for NZ$513 million. Additionally, Fonterra is selling 85% interest in its Hangu farm to Beijing Sanyuan Venture Capital Co., Ltd., for NZ$42 million. Before the purchase, Sunyuan owned a 15% minority share in the farm.
Fonterra's decision to sell off assets took place amid positive earnings performance. According to its 2019/20 annual report released Sept. 18, the company saw NZ$1.1 billion profits after tax, up from a loss of NZ$17 million one year ago, meanwhile net debt was down to NZ$4.7 billion, reflecting a NZ$1 billion reduction compared with one year earlier.
Fonterra expects to use the proceeds to pay down debt, as part of its previously announced overall debt reduction program, according to the company statement.
Last year, Fonterra wrote down the value of the farms by $135 million and lost more than NZ$600 million, largely because of trouble with its overseas markets including China, Brazil and Venezuela.
Thinning Out The Herd
"For the last 18 months, we have been reviewing every part of the business to ensure our assets and investments meet the needs of the co-op, " CEO Miles Hurrell said. "Selling the farms is in line with our decision to focus on our New Zealand farmers' milk."
As the biggest dairy producer in New Zealand, Fonterra's business accounts for 85% to 95% of production in the island nation, while 96% of its production is exported. It is one of China's major suppliers in dairy raw materials. Industry analysts said China receives around a quarter of Fonterra's production each year.
Viewing China as one of its most important strategic markets, Hurrell said the company would bring the goodness of New Zealand milk to China customers. Meanwhile, the company claimed its investment in research and development and application centers in China will support this direction.
A Formula For Investment Losses
Hurrell said in the company's financial announcement that there had been adverse events over recent years, highlighting a higher level of risk in operating the farms than previously anticipated.
In 2015, Fonterra acquired an 18.8% stake in domestic infant formula brand Beingmate for NZ$750 million, in an attempt to sell its Annum infant formula and other products through Beingmate's 80,000 retail outlets and 20,000 "maternal service consultants."
Beingmate amassed large debts along with its rapid expansion. In the face of product safety concerns, unstable management and disorganized distribution, Beingmate reported 781 million and 1.057 billion yuan losses, respectively, in 2016 and 2017. Its shares fell 73% to as low as 4.7 yuan per share from 17.68 yuan.
Affected by Beingmate's performance, Fonterra reported up to NZ$196 million in net loss in September 2018, the first loss since the establishment of its China unit in 2001. It said the partnership with Beingmate was "disappointing."
Beingmate shares were last trading at 6.99 yuan each.
