Fonterra Co-operative Group’s plan to divest its global consumer business under the newly minted “Mainland Group” brand has entered a critical phase, with the dairy giant now fielding non-binding bids and conducting investor roadshows. The dual-track process — a potential trade sale or initial public offering (IPO) — could see the business valued between $2.5 billion and $3 billion, although analysts caution that the top end is only likely achievable through a trade sale.
The move, part of Fonterra’s broader strategy to focus on its Ingredients and Foodservice divisions, has raised both hope and concern among shareholders, especially given the promise of a “significant capital return” once the transaction is completed.
IPO or Trade Sale?
Fonterra’s board is testing both divestment options before bringing a final proposal to farmer shareholders for a vote. The IPO route, if chosen, would see the newly independent Mainland Group led by CEO-elect René Dedoncker and CFO-elect Paul Victor, both seasoned executives with deep experience in the cooperative’s consumer operations. Chair Liz Coutts has also been named for the potential listing.
Investor roadshows are already underway in New Zealand, Australia, and Asia, with Fonterra aiming to build support and gauge market appetite. Dedoncker and Victor are presenting the case for a standalone Mainland Group, highlighting $4.9 billion in annual revenue and $200 million in earnings before interest and tax (EBIT) in 2024.
However, the prospect of a trade sale remains on the table, with global and regional dairy players such as Lactalis and Bega reportedly expressing interest. Fonterra has made it clear that the chosen route will aim to maximise long-term value for farmer shareholders, a key stakeholder group that holds final voting power on any deal.
A Business with Legacy Challenges
Despite its iconic brands — including Anchor, Mainland, Kāpiti, Anlene, and Fernleaf — the consumer business has long underperformed within Fonterra. Forsyth Barr analysts Matt Montgomerie and Benjamin Crozier were blunt in their assessment, calling the segment one of Fonterra’s “long-standing problem areas” with “negligible growth and poor returns on capital.”
In 2024, the division posted EBIT margins of just 4% and a return on invested capital (ROIC) between 5% and 6%, metrics considered underwhelming given the consumer focus. Fonterra itself has acknowledged that it is “not the natural owner” of these businesses, a view that has driven its current divestment efforts.
Spotlight on Australia
The performance of Fonterra’s Australian operations — a core part of the Mainland Group — has come under increasing scrutiny. Forsyth Barr cited a decade of negative free cash flow and a 3% ROIC, raising concerns about underutilised assets and inefficiencies. The business operates eight processing sites, and analysts have questioned whether all are truly necessary given current volumes.
“The businesses appear to have lacked consistent management focus,” Montgomerie and Crozier wrote, adding that both consumer and Australian divisions may have suffered from fragmented oversight. Fonterra has been criticised for a lack of transparency around the specific drivers of underperformance in Australia and the steps being taken to address them.
The Buyer Field: Thinning Fast?
Two suitors have been named in the bidding process: French dairy multinational Lactalis and ASX-listed Bega Group. But speculation is growing that Bega may be out of the running due to balance sheet constraints. The company, which has a market capitalisation of A$1.59 billion, is carrying net debt of A$207.2 million and would likely need to raise capital to finance any acquisition.
Bega has not commented publicly, but a New Zealand dairy industry source questioned whether the company could realistically compete with a player like Lactalis, which has far deeper financial resources and a global footprint.
What’s in It for Shareholders?
For Fonterra’s farmer shareholders, the outcome of the Mainland Group sale could represent a rare windfall. Previous estimates from Northington Partners and Jarden suggested up to $3 billion could be returned, though those figures were based on a broader divestment scope. Since then, Fonterra has opted to retain some assets, including its Chinese consumer business and a manufacturing site in the Middle East.
Still, with shares in the Fonterra Shareholders’ Fund recently trading at $5.51 — up from $3.65 a year ago — and Forsyth Barr setting a $6 price target, the market appears optimistic. The co-op’s recent profit upgrade, which lifted full-year earnings guidance to between 55 and 75 cents per share, has further buoyed sentiment.
Strategic Reset or Missed Opportunity?
CEO Miles Hurrell has framed the divestment as a strategic reset that allows Fonterra to sharpen its focus on areas of higher return. “We are clear on our strategy and have a pathway to grow further value for farmer shareholders and the New Zealand economy through our innovative Foodservice and Ingredients businesses,” he said.
Yet, some analysts argue that the consumer division could still be turned around under new ownership through operational improvements and brand rationalisation. Forsyth Barr noted that under a more focused management structure, there is “scope for cost efficiencies” and potential margin improvement.