Key takeaways
- Fonterra’s strategic shift focuses on consolidating its operations around its high-performing ingredients and foodservice divisions, moving away from consumer brands.
- The divestment is expected to generate nearly NZ$3.2 billion for shareholders on completion.
- Selling to Lactalis allows Fonterra to continue supplying milk and dairy ingredients, ensuring New Zealand milk remains integral to the brands.
- The trade sale to Lactalis provides quicker capital returns to farmer shareholders compared to an IPO and supports Fonterra’s long-term strategy of focusing on its core businesses.
- The divestment is expected to enhance Fonterra’s efficiency and profitability, enabling a stronger focus on its innovative products in the global market.
Last year, Fonterra set out to consolidate its operations around its most profitable ingredients and foodservice divisions and shed non-core assets, such as its portfolio of consumer brands.
The strategic move would deliver ‘a simpler, higher performing co-op’ while generating significant value for shareholders, CEO Miles Hurrell explained.
In line with Fonterra’s original expectations, agreeing a sale took around 15 months and is set to deliver nearly US$2.5bn once the deal is formalized, likely in the first half of calendar 2026.
Lactalis was the winning bidder for Fonterra’s assets known collectively as Mainland Group and comprising Fonterra’s global consumer business (excluding Greater China) and consumer brands; the integrated foodservice and ingredients businesses in Oceania and Sri Lanka, and the Middle East and Africa foodservice business. The deal also includes Bega’s cheese manufacturing licenses.
We look back on the divestment process so far and consider the implications for the New Zealand co-op.
A step-change in strategic direction
Even before word got out that Fonterra had decided to focus on its B2B business, prospective buyers were lining up for the co-op’s non-core divisions, which collectively generated nearly NZ$4.9bn (US$2.8bn) in sales in FY24.
Announcing the strategic pivot in May 2024, Fonterra CEO Miles Hurrell said the co-op had received ‘unsolicited interest in parts of these businesses, making now a good time to consider their ownership’.
The decision was also driven by a strategic review of the organization, which revealed that the best ROI lied within Fonterra’s high-performing ingredients and foodservice divisions and not consumer dairy, despite Fonterra owning some of Oceania’s best-known dairy brands.
“While these are great businesses with recent strengthening in performance and potential for more, ownership of these businesses is not required to fulfil Fonterra’s core function of collecting, processing and selling milk,” Hurrell said.
Collectively, the consumer and integrated businesses utilize around 15% of the co-op’s total milk solids and represented approximately 19% of Fonterra’s group operating earnings in H1 FY24. In comparison, the Ingredients channel uses around 80% of milk output.
The ‘core’ businesses also generated the highest sales: Ingredients bagged NZ$17.4bn for the co-op in FY23, compared to NZ$3.3bn from Consumer and NZ$3.9bn from Foodservice.
Overall, Ingredients and Foodservice generate the majority of Fonterra shareholder returns through both dividends and farmgate milk price.
“We believe Fonterra is not the highest-value owner of the Consumer and associated businesses in the longer term and a divestment could allow a new owner with the right expertise and resources to unlock their full potential,” Hurrell said at the time. “This presents a great opportunity for these brands and businesses.
“While I recognize there’s a strong connection to brands such as Anchor, a new owner could help these businesses to flourish.”
Pitting trade buyers against investors
Next: hatching a divestment strategy to yield the strongest value for the co-op. Here, Fonterra explored both an IPO and a trade sale, welcoming interest from investors and industry alike to determine the best course of action.
Fonterra’s chosen option would balance the following factors:
- Maximize long term value for farmer shareholders, including the best return on capital invested;
- Secure Fonterra’s competitive advantage in Ingredients and Foodservice; and
- Expand international channels to market for New Zealand dairy.
The for-sale assets were bundled under a new corporate identity, Mainland Group, in November 2024, and investor roadshows commenced in March 2025.
Fonterra veteran René Dedoncker and finance expert Paul Victor met with potential investor groups and the co-op even brought onboard Elizabeth Coutts, a seasoned board director and chair of public, private and social enterprises, as it assessed non-binding indicative offers from potential purchasers.
Mainland Group made for an attractive proposition: the business generated NZ$4.9bn (around US$2.8bn) in sales in FY24 and was geographically-diversified, with presence in both developed and emerging markets across Oceania, APAC, Southeast Asia and MEA and a portfolio of brands spanning from Anchor and Fernleaf to Western Star.
At the same time, a healthy demand for dairy commodities meant Fonterra was operating from a position of strength. In its interim results released in March 2025, the co-op reported milk collections, earnings performance and its forecast farmgate milk price were all up year over year.
And in May’s quarterly update, it became clear that the co-op’s consumer business was going from strength to strength, having recorded its highest YoY operating profit increase across the entire group. While those results included Greater China, which remains under Fonterra’s ownership, one key volume driver for the business were packaged milk powders in South Asia.
At the same time, a trade sale was becoming increasingly likely, with Lactalis and Bega emerging as key suitors.
Lactalis filed for informer merger approval with Australia’s competition regulator, ACCC, to clear potential barriers ahead of a formal deal, while Bega was disputing Fonterra’s right to put its cheese manufacturing licenses up for sale at the same time as pursuing a deal with the co-op.
Bega reportedly partnered with FrieslandCampina to table a proposal for Mainland Group and also launched an ACCC review in August, only to come short in its valuation, leaving Lactalis the highest bidder, at NZ$3.85bn base value which rose to a total of NZ$4.2bn (US$2.4bn) inclusive of the Bega cheese licenses.
What Fonterra stands to gain
Besides a windfall for shareholders – the co-op is targeting tax-free capital return of NZ$2.00 dollars per share, which is approximately NZ$3.2bn (US$1.8bn) on completion – Fonterra will continue to supply milk, dairy ingredients and other products to the divested businesses, meaning that brands like Anchor and Mainland will still be made with New Zealand milk.
In addition, the trade sale will get capital returns into farmers’ pockets faster than an IPO would have, chairman Peter McBride indicated.
Selling to a trade buyer was also the best way to divest the entire Mainland Group, he added, suggesting that investors may have been interested in separate assets from the corporate portfolio.
Completing the divestment would also ensure the co-op achieves its financial objectives, such as an average Return on Capital of 10-12% and an FY25 earnings guidance of 65-75 cents per share.
Offloading Mainland Group to Lactalis would also support Fonterra’s long-term strategy, clearing the way for a more efficient and profitable co-op.
“A divestment of these businesses will allow Fonterra to deliver further value for farmer shareholders and New Zealand by focusing on our world leading Ingredients and Foodservice businesses, through which we sell innovative products to more than 100 countries around the world, from our home base here in New Zealand,” said Miles Hurrell.
What’s next for Fonterra?
All eyes will now be on the New Zealand co-op’s upcoming FY25 annual results in September, when the organization will announce its FY26 earnings guidance.
Meanwhile, Fonterra has deferred its Annual Meeting from November 2025 to December as the co-op seeks farmer shareholder approval on the divestment by ordinary resolution at a Special Meeting, to be held in late October or early November 2025.
More recently, the co-op raised its FY25 season forecast Farmgate Milk Price by 15 cents - from $10.00 per kgMS to $10.15 per kgMS – and narrowed its FY26 range from $9.70 - $10.30 per kgMS to $10.10 - $10.20 per kgMS.
“We began the season with a wide forecast range to account for potential volatility in commodity prices and exchange rates resulting from geopolitical dynamics,” Hurrell said. “However, Global Dairy Trade prices have remained stable, and when coupled with our well contracted sales book, we have been able to increase our forecast Farmgate Milk Price across the season.
“Global Dairy Trade prices continue to be strong, supporting the $10.00 per kgMS forecast midpoint for the current season. However, it’s still early in the season and the risk of volatility remains, which is reflected in the wide forecast range,” the CEO concluded.