Fonterra says sale of the China farm interests will allow the co-op to 'prioritise the areas of its business where it has competitive advantages'

Fonterra's continuing to tidy up its affairs after over-extending a few years ago, and has now agreed to sell its China farms for a total of $555 million (RMB 2.5 billion).

Completion of the sale is expected within the current July financial year.

The co-operative launched a back to basics approach after a disastrous expansion strategy under previous chief executive Theo Spierings, which saw it reporting a $605 million loss.

It has continued to sell down assets now no longer seen as forming part of its core business and more recently returned to profit and to paying a small dividend.

On Monday current Fonterra chief executive Miles Hurrell said Inner Mongolia Natural Dairy Co., Ltd, a subsidiary of China Youran Dairy Group Limited (Youran), had agreed to purchase Fonterra’s two farming-hubs in Ying and Yutian for $513 million (RMB 2.31 billion).

Separately, Fonterra had agreed to sell its 85% interest in its Hangu farm to Beijing Sanyuan Venture Capital Co., Ltd. (Sanyuan), for $42 million (RMB 190 million). Sanyuan has a 15% minority shareholding in the farm and exercised their right of first refusal to purchase Fonterra’s interest.

"We don’t shy away from the fact that establishing farms from scratch in China has been challenging," Hurrell said.

"But our team has successfully developed productive model farms, supplying high quality fresh milk to the local consumer market. It’s now time to pass the baton to Youran and Sanyuan to continue the development of these farms."

The farms had been up for sale for some time and Fonterra has had to write down the value of them.

"The sale of the farms will allow the co-op to prioritise the areas of its business where it has competitive advantages," Hurrell said.

“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 today. Selling the farms is in line with our decision to focus on our New Zealand farmers’ milk."

Hurrell said China remained one of Fonterra’s most important strategic markets, receiving around a quarter of its production and selling the farms would allow the co-op us to focus "even more" on strengthening its foodservice, consumer brands and ingredients businesses in China.

"As previously announced, through the sale process and strategic review of our China Farms we gained additional information and further insights and, as a result, revised down the valuation of these assets.

"The transaction value is subject to customary purchase price adjustments, and exchange rate movements. Any gains or losses on the sale would be normalised upon completion of the sale."

Hurrell said Fonterra expects to use the cash proceeds from the two transactions to pay down debt, as part of its previously announced overall debt reduction programme.