Dairy co-operative Fonterra's saying goodbye to some household-name brands, including Anchor and Mainland - but analysts with investment services group Forsyth Barr say it's going to be better off without them.
Fonterra last week announced the divestment of its consumer and associated businesses (recently styled as Mainland Group) to French dairy giant Lactalis for a price now confirmed to be $4.22 billion. Fonterra's farmer shareholders - who stand to get a $2 per share tax-free windfall [via a capital return] - will vote on the proposal in either October or November and then the sale is expected to go through in the first half of next year.
Forsyth Barr senior analyst Matt Montgomerie and analyst Ben Crozier say the sale price "was ahead of our expectations" and they believe Fonterra's "robust balance sheet" and sustainable earnings of around 50c per share wil in futurel support dividends of about 40c per share, representing an "attractive" post-capital return gross yield of about 11%.
They refer to the assets sold as "the poor-performing Mainland Group".
They say they view Fonterra as a "much higher-quality business" without the consumer and Fonterra Australia operations - "both perennial underperformers historically".
"We think [Fonterra ]is a much better business without Mainland Group. While the total possible consideration of ~NZ$4.2b is a large number, we estimate Mainland Group (once adjusting for future Lactalis earnings as a customer) is only 10%–15% of earnings.
"...Fonterra won’t actually change dramatically as a business.
"What remains will be a refreshed focus on the better-performing core Ingredients and Foodservice businesses. Over the last three years, these have delivered an average ROIC of ~14% (ex Australia) versus Australia and Consumer of ~4%."
The analysts say the consumer business "has long been a problem area" for the co-operative.
Poor performance over time reflects this, "likely driven by subscale and fragmented operations, lack of strategic focus, lack of high-quality fast moving consumer goods management, and a limited product portfolio relative to large global brand owners".
Since the 2012 financial year the division has recorded impairments of nearly $700 million - including Tip Top and the Australian yoghurts and dairy desserts businesses (both of which have now been divested).
Excluding these, impairments still total about $370 millon, mainly in NZ and Asia brands.
"Earnings and returns have been volatile and consistently weak."
Over the past three years, Consumer’s return on capital was -0.4%, 3.2%, and 7.7%, compared with 8.4%, 16.2%, and 12.2% for Foodservice and Ingredients combined.
Fonterra's core strength "is milk processing—not branded consumer products".
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