Fonterra needs to give a fulsome explanation in its forthcoming interim results of just what is happening with its teetering investment in China's Beingmate

By David Hargreaves

Well, some people might say that the latest "another fine Chinese mess you've got me into" episode from Fonterra is a big problem for the farmers.

Personally, I don't see it that way.

Well, yes, okay, it is a problem for the farmers, but also, I reckon if Fonterra's got problems I have got problems. Anybody who lives in New Zealand has a problem.

Fonterra sneezes: We catch a cold.

A very significant part of New Zealand's economy, and therefore the wellbeing of us all, is entrusted with Fonterra. That's why I was and remain opposed to the creation of one giant dairy company. It was and is putting all our milk in one pail. If the guys in charge of this 'one company to rule them all' mess it up then potentially they mess up the whole industry. And leave our economy floundering.

Now, they haven't done that, but the record is, shall we say chequered. And no more so is this the case than with involvement in China - a hugely important market.

Sanlu

Fonterra won't appreciate me bringing up the Sanlu disaster, but I'm afraid you can't look at the new China Crisis it faces without some regard to history and mistakes that were made and apparently have been repeated.

In the mid 2000s of course the 43% investment by Fonterra in Sanlu was the New Zealand company's big gateway into China. But in 2008 Sanlu was heavily implicated in the industry-wide tainted milk scandal in China in which six infants were reported to have died and more than 50,000 hospitalised. Fonterra ultimately wiped the $200 million value of its investment in Sanlu.

When Fonterra therefore announced in 2014 that it was having another go, this time with a deal that ended up in it investing in March 2015 the sum of $756 million for 18.8% of Beingmate Baby & Child Food Co, there was nervousness out there. But Fonterra assured everybody it would be okay this time.

When announcing the intention to invest in Beingmate Fonterra Chief Executive Theo Spierings said the partnership would be a "game changer" that would "provide a direct line into the infant formula market in China, which is the biggest growth story in paediatric nutrition in the world."

Spierings, and any named Fonterra executives for that matter, were notable by their absence in the statement that Fonterra's corporate communications unit issued on Monday informing the NZX that Beingmate's loss for the 2017 year could be over $200 million, basically double what had earlier been indicated.

But of course the even bigger concern is the comments questioning the financial management and reporting of Beingmate

This is going to need some explanation.

This is looking worse

Right now the financial loss from this latest misadventure actually looks like it will be worse than that from Sanlu.

It's not crystal clear from Fonterra's annual accounts, but to this point the Beingmate stake has not been written down by much. The 2017 Fonterra accounts gave a valuation of "investments in associates" - presumably mostly Beingmate - of $617 million, down from $739 million the previous year.

At current market values the Beingmate stake is worth about only $250 million.

But things could get worse yet. How will the Chinese market authorities react to the apparent boardroom disagreements going on?

The other point is that the rules of the Shenzhen Exchange on which Beingmate is listed suggest that the exchange can threaten to delist a stock that makes two consecutive losses - as Beingmate will.

A delisting of Beingmate would surely leave Fonterra up the proverbial in terms of negotiating any value for its stake.

Now brave people might argue that even if Fonterra loses a big chunk of the $750 million it invested, it's big enough to bear it. 

Well, yes, but how many deals like this can even a giant company bear?

Loss of opportunity

And the other point is it is not just the fact that the money invested gets lost - it's the loss of opportunity. Even just sticking that amount of money in the bank in 2015 would now see the original investment worth about $850 million. A sound investment in a company making money could have easily seen that money now be worth over $1 billion.

But beyond these kinds of figures lurks another potentially very dicey area, namely: How handcuffed to Beingmate is Fonterra when it comes to distribution of its products in China? I don't know, because Fonterra simply hasn't spelt out enough detail of how its arrangements with Beingmate work.

Potentially the disadvantage to Fonterra from what looks like a disastrous decision may go way beyond the 'headline' amounts of money lost. 

Note, however, that I am getting into some speculation. And I'm speculating because I don't know and because Fonterra has said so little in its public communications in the past three years about what is going on with Beingmate.

We need information

Fonterra is set to release its interim results toward the end of March. At the very least it needs to come out with a very clear description of what exactly has gone wrong, what the losses are, what writedowns it will take, what potential long-term damage has been done to its trading prospects in China, and what the path forward is from here.

In actual fact, I think it would be preferable if Fonterra could say something substantial on this even before the interim release. 

I'm afraid Fonterra really has to this point applied 'the mushroom approach' with the Beingmate Investment.

Well, the farmers and, yes, the people of New Zealand need some explanations. Fonterra, you are carrying our pail of milk. Where are you taking it?

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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23 Comments

Long story short:

Fonterra would like to have a stake in Mengniu or Yili or Wahaha but the stake was way to high.

Here came Beingmate. The offer is not as nearly high and seemed good value for money since Fonterra was saying that it only wanted its distribution channels in China.

But a closer look would tell you Beingmate's market share in China and its brand influence were to small to compete with other local giants.

Fonterra made the right decision to invest infant formula industry but the wrong decision to invest in a doomed company.

How did Fonterra miss the A2 bus? Whoever signed off on this Beingmate deal needs to see the door...farmers should be demanding it!

That happens when a company does not put the brightest person in charge.

It may good if the directors had corporate experience such as CFO, CIO, CEO, or even a couple of appropriate PhD.
Danone seems to have a respectable lineup.

Frazz
When A2 hit the shelves I guess Fonterra thought it was such a small market why bother
As it turned out I found it would leave the shelves quickly & there weren’t enough herds to produce quantity

Fonterra should stop wasting its resources on China
It needs to go back to where it initially went wrong when it’s farmer shareholders rejected a separate brand division focused on consumers
If it had done this decades ago now it would have variety of brands & excellent consumer awareness & product identifiabilty around the world.
As it is it is still stuck primarily as a bulk dairy producer filling sacks of dried milk powder for others around the globe to create products from.
China is another story filled with pathos for Fonterra
Fonterra will continue to find China daunting I predict although it’s CEO may state otherwise

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1197...
"We are also aware that as part of this announcement, four Beingmate directors, including the two directors designated by Fonterra, have expressed reservations relating to some aspects of Beingmate's financial management and reporting practices," Fonterra said.
"We have total confidence in the judgement of our designated directors - Johan Priem and Christina Zhu - and that their actions are in the best interests of Beingmate and all of its shareholders," Fonterra said.
"We are concerned about the reservations they have expressed and are seeking clarification on the matters of concern," it said.

So these directors are washing their hands of the company? Question: What are directors for?

Someone needs to ask how much the legal bill was in The Danone scrap?

Farmers have been saying this in the local pubs for years now ......... The only thing Fonterra Head Office produces are major cock-ups , and expensive Company cars out of the head office basement at 5.00pm every day .

Its the farmers who wake up at 4.00 am in the wet icy cold and milk cows that keep the whole edifice from crumbling .

Its the smart -arses at Head Office who hatch these expensive ill-conceived plans to do things they dont understand , that are way out of their league , and way out of there ability to control .

Frankly , they should keep it simple and export baby formula to a Chinese supermarkets and be done with it , just like Nestle , and the other serious Global food players.

Ok,
Are we using the Alliance Freezing Company as a model for how to do it right?
There were a lot of government funds in them as well, from memory.

"Dumpty do, another day at Fonterra. Guess we'll have to lower the payout again..."

"Hey Theo, how much of a raise do you want this year?"

That stupid name was the first clue that Fonterra should have realised they were dealing with something shonky.

Now that they are no longer being such good mates , whats the exit strategy ?

The dairy industry as a whole is heading down the path of the meat industry ....too much production capacity....fonterra is leading that trend.....Darfield is a good example as they cant even fill the plant up ...put it in the wrong place....top of the south plants look dodgy as a consequence.....i worked for them since inception until recently....quantity is a destination ....Quality is a journey....fonterra is obsessed with market share and stumbles along in a reactive mode....all management i came into contact with was more concerned with getting up the ladder than the interests of farmers and get rid of the likes of Theo.....they were even paying Richie $1mill per annum......farmers will ultimately pay the cost of all this mal investment....

this is what I googled...so not sure if the numbers are right:

Fonterra paid $755 million for a 19% stake in Beingmate.
This deal was done after Beingmate had a collapse in earnings..

SO... Fonterra paid $755 million for a 19% share of a $22 million profit...

SO... 19% of $22 million = $4.2 million on an investment of $755 million

THAT equals a return of equity of 0.6 %..... less than 1% ... yeha!!

They were NEVER going to get a return on investment ... ( they kinda paid for the next 20yrs of, now unlikely, future growth... idiots )

keep in mind ....Fonterra knew all this , going INTO the investment..!!!!

Fonterra must have had some kind of 50 yr strategic plan..??? if not ..it all seems a little crazy
maybe they were seduced into the deal..??
Lots of red wine and local hospitality...and lots of promises ...hehe... :)

or perhaps the cost of doing business in China, or pay back for taking all the unsold powder?

The directors should check if they believe there are off balance sheets or quid pro quo activites.
I trust there is an Audit and Finance Committee

Outrageous but my concern is our society allows these forms of shennanigans.
We need to face our "she' ll be right " Tuis mentality and say its not alright mate.
Replace it with " Shape up or ship out"
Disclaimer. Im not a beer drinker.
Or a member of the Naval Reserve.

Is Theo planning to return to a dairy company in the Netherlands and claim on his CV that he eliminated the New Zealand competition?

Look I know this is a poor generalisation and that there must be some successful NZ Small-Medium size Enterprises, but it appears we just are not very good large capitalists overseas.

Look at the list - Michael Hill; Hallensteins; Fonterra; Spark; Xero(?); Comvita; Moa; Pumpkin Patch; Wynyard Group....maybe I'm being unfair but do we suck culturally, or financially, or from a governance perspective?

Thats a large range of business, some quasi goverment, some multigeneration family, some well lead startups.
Analysis may be better case by case.
Fonterra is quasi goverment and is attempting to move from commodity trading to branded retail products.
But its hard to change a culture and I was idly looking at significant international companies, GM and Danone.
Of course they have a manufacturing culture but their directors, from other organisations, look pretty experienced as well.
We could learn from that.

Wonder how many shareholding farmers make $8mil per year?

How much are they paying their CEO per year? Is he worth it? Would they be better off with somebody who is worth it? What was his track record before he came here?