The A$60 million investment for 12.3 million shares, or 9%, of Bega Cheese has shrunk a little below the share purchase prices, although that has been offset since by the rise in the value of the New Zealand dollar.
It is not clear what Fonterra has gained, because it already had a long-term agreement with Bega on branding and cheese supply.
Nor had the stated objective been achieved, analysts said.
Fonterra has confidence in Bega and the strategy it is pursuing, chief executive Theo Spierings says.
Fonterra chief executive Theo Spierings said in November, when the co-op bought Bega shares, it was important to participate in the consolidation of the Australian dairy industry.
“Australia is an important market for Fonterra and we are committed to growing our already strong presence. We have confidence in Bega and the strategy it is pursuing,” he said.
Last week Bega withdrew from the battle for ownership of listed company Warrnambool Cheese & Butter (WCB) and banked a considerable profit of more than A$60m.
Executive chairman Barry Irvin said the profit would enable Bega to pay down its debt at a time of need and position the company for the future.
Bega’s sale of 18.8% of WCB to Saputo Australia for A$9 a share took the Canadian dairy company to nearly 50% of WCB and cleared the way for a takeover.
However, consolidation has not occurred, because Saputo is a newcomer to the already complicated Australian dairy industry ownership structure.
The $500m-plus sale of WCB made it the world's most expensive dairy company based on price-earnings ratios, the Sydney Morning Herald said.
The battle for WCB began in August, when its share price was just $4.50. At that time Bega’s shares were $2.75 but Fonterra paid an average of $4.87 and the latest market price is $4.73.
Bega and Fonterra found the bidding for WCB too rich and Bega withdrew with a handsome profit after three years of “strategic relationship”.
It invested in WCB in 2010 as part of a capital raising to pay down substantial debt and has bought on the market since, as well as reinvesting dividends.
“Our preference was for WCB to remain Australian-owned, either through acceptance of our offer or Murray Goulburn’s bid,” Irvin said.
“But the board is conscious of the significant value of the WCB shareholdings and its obligation to make sensible investment and capital management decisions.”
Analysts said Fonterra’s 9% would give it no say over Bega’s direction. It would not even have a board position.
At best the stake might prevent a hostile takeover, but Bega already had a constitutional prohibition against single shareholdings greater than 10%, they said.
The majority of the 20 largest shareholders are milk-supplying farms with one million to four million shares.
Directors and senior staff members collectively have 12 million of the 152 million issued shares and three directors, including Irvin, are among the top 10 shareholders.
But WCB had a similar shareholder cap that lapsed, leading to the bidding war.
WCB is Australia’s oldest dairy processor and celebrated 125 years last year.
Saputo’s Canadian chief executive and vice-chairman Lino Saputo Jnr told WCB shareholders in October the company could capitalise on Asian dairy demand and reverse the decline in Australian milk production.
Fonterra’s biggest rival in Australia, Murray Goulburn co-operative, has 17% of WCB shares and stands to make a similar profit to Bega if it sells to Saputo.
Fonterra, Murray Goulburn, and WCB all have plants in western Victoria and compete strongly for supply farms.
In 2001 Bega Cheese entered a 25-year franchise licensing arrangement, which permits Fonterra to use the Bega brand in Australia.
There is also a cheese supply agreement covering Fonterra’s bulk cheese through Bega’s cut-and-wrap facility at Bega on the south coast of New South Wales.
