FONTERRA chief financial officer Lukas Paravicini said he sees room for further collaboration and supply agreements with ASX-listed Bega Cheese, but he ruled out a near-term bid for the NSW dairy company amid a wave of consolidation in the sector.
During the heat of the $500 million takeover battle for Warrnambool Cheese & Butter (WCB) last year, Fonterra, the world’s largest dairy exporter, forked out about $50 million to take a 10 per cent stake in Bega Cheese, fuelling speculation of an imminent takeover.

“It’s a strategic decision. We made a statement there. There’s no further intent but it’s clearly a statement. Bega is for sure a player that has a special relationship with Fonterra,” Mr Paravicini told The Australian Financial Review.

“They also complement our port­folio very well. There are interesting areas of collaboration we could exploit in the future be they supply agreements, exports or nutritionals.”

Fonterra licenses the Bega brand in Australia and is the major customer through Bega’s Ridge Street cheese cut and wrap facility.

There has been growing interest in Australian dairy, as evidenced during the battle for WCB, which drew multiple suitors, including locals Bega Cheese and the Murray Goulburn Co-operative, as well as global companies Kirin and the ultimate winner of the showdown, Canada’s Saputo. The saga stretched from September through to the start of this year and sparked a ­doubling of Warrnambool’s share price from $4.51 to a peak of $9.48. It last traded at $8.48 a share.

“Everyone wants in now. It will be interesting to see who wins and what valuations are like given Warrnambool, the last transaction, went for a big multiple,” RBS Morgans analyst Belinda Moore said.

Despite the increased interest in Australian dairy, analysts believe there is only room for a few brands on supermarket shelves.

Coles and Woolworths are continuing to streamline products, forcing dairy producing to re-think strategies, which may result in fewer brands being available on the market.

“There are too many brands in the dairy cabinet. If you go to the dairy ­cabinet, it’s a wall of colour and choice. There has to be some rationalisation there,” PAC Partners industrial analyst Paul Jensz said.

Processing assets across Australia are underutilised, adding merit to further consolidation and use of facilities.

On average, Australian processing assets are operating at about 75 per cent capacity, with a large chunk of that excess in the making of drinking milk, Mr Jensz said. “There is not enough milk to go around. That needs someone – or some group – to sort it out.”

Bega Cheese collects about 650 million litres of raw milk a year, making it the sixth-biggest processor in Australia in terms of milk collection. Murray Goulburn is the biggest with 3 billion litres, and its managing director, Gary Helou, has predicted the number of processors in Australia will halve.

“You can look at who the players are and the relative size and conclude what path consolidation will take, but I’m not going to comment on that,” Mr Para­vicini said.

“There is room for further consolidation. You can increase efficiency and focus by having further consolidation.”

Last week French-owned giant ­Parmalat bought Western Australia’s biggest dairy exporter, Harvey Fresh, for $120 million and, in February, Hong Kong businessman William Hui paid $70 million to buy United Dairy Power, the nation’s biggest private processor.

“We are actively monitoring the situation,” Mr Paravicini said.

Last week Fonterra sealed a 10-year deal to supply Woolworths’s Select white milk in Victoria at the expense of rival Lion (owned by Kirin).

Source: Financial Review