Fonterra reaped 25% gain from Bega shares driven to record by Blackmores tie-up

Fonterra Cooperative Group [NZX: FCG] reaped a 25% gross gain on its two-year investment in Australia's Bega Cheese shares, which jumped to a record last week after announcing a partnership with Blackmores that will compete with the New Zealand dairy exporter in China's infant formula market.

Fonterra spent about $A60.7 million to build a 9% stake in Bega in November 2013, which it sold last week for $A74 million. It also received about $A1.6 million of dividends. Fonterra is in the process of transforming its Australian business, having taken a $108 million writedown of its yoghurt and dairy desserts assets across the Tasman in 2015. The gain on the Bega shares compares to a 5% return on capital from its Oceania consumer and food service business in 2015.

The sale wouldn't affect Fonterra's commercial relationship with Bega, which includes a licence on the Bega brand and a supply contract for cheese, said chief financial officer Lukas Paravicini. The sale was the best use of the capital, he said.

The sale comes after Fonterra announced last week Australian managing director Judith Swales had been promoted to managing director Oceania, a new unit that adds the New Zealand consumer business to Fonterra's Australian segment. Fonterra Brands NZ will continue to run as a standalone unit in New Zealand, answering to Swales.

Bega's shares jumped as high as a record $A6.02 last Thursday, after the announcement of the Blackmores tie-up. Blackmores' own shares have soared 376% this year and also hit a record last week on the prospects of the infant formula market, where demand for its vitamins helped almost triple sales in its third quarter.

China's infant formula market was expected to almost double to $33 billion by 2017 but that was before the world's second-largest economy said it would end its one-child policy introduced in 1979, potentially doubling the market for baby food in a country where fewer than one-third of infants are exclusively breast fed.

"We are aware from our presence in the Asia region that there is significant demand for infant formula and we believe that, with the combination of Blackmores and Bega, we're uniquely positioned to support those women who are unable to breastfeed," the two companies said in announcing their partnership last week.

Fonterra has its own partnership for Chinese sales of infant formula, with Shenzhen stock exchange-listed Beingmate Baby & Child Food. Their joint venture purchased Fonterra's Darnum plant in Australia and, under their distribution agreement, Beingmate is Fonterra's exclusive distributor in mainland China for its Anmum mother and baby supplements.

Fonterra Shareholders' Fund units, which are entitled to the dividends from Fonterra's ordinary shares, rose 0.6% to $5.41 and have fallen 10% this year.

(BusinessDesk)