Fonterra sells China Ying, Yutian farming hubs for $522 million

Fonterra has completed the sale of its two wholly-owned China farming hubs in Ying and Yutian for $522 million.

The co-op said in October the sale of the farms to Inner Mongolia Youran Dairy Co (Youran) was subject to anti-trust clearance and other regulatory approvals in China.

These approvals have now been received, Fonterra said.

The transaction proceeds comprise the original sale price of $513m plus $39m in settlement adjustments.

Chief executive Miles Hurrell said the completion of the sale was an important milestone for Fonterra following a change in strategy.

“Fonterra has contributed to the development of the Chinese dairy industry by establishing these farms and we’re pleased to now hand ownership over to Youran for the next phase of development,” he said in a statement.

“As we’ve seen from our recent 2021 interim financial results, our China business is performing very well, underpinned by strong demand for New Zealand dairy driven by our team on the ground,” he said.

“With these foundations, we are well placed to continue to grow our Greater China Foodservice, Consumer and Ingredients businesses,” he said.

The completion of the sale of Fonterra’s 85 per cent interest in its Hangu farm to minority shareholder Beijing Sanyuan Venture Capital Co – also announced in October -is progressing and is expected to be completed this financial year.

As with previous one-off transactions, Fonterra’s 2021 announced forecast earnings range would continue to reflect only the underlying performance of the business.

Fonterra said last month that a “standout performance” from its Greater China business helped drive its normalised operating profit for the six months to January up by 17 per cent to $684m.

The co-op also said it would pay a 5c interim dividend after opting not to pay one in the previous corresponding interim period.

Fonterra has forecast normalised earnings per share for the year of 25-35 cents.

Despite a strong first half, Fonterra expected its earnings performance to come under “significant pressure” – due to higher milk prices – in the second.

Ratings agency S&P Global said healthy demand for milk and other dairy products is pushing up the cost of raw milk in China, fuelling a merger and acquisition boom.

As a result, suppliers will increase imports of milk products, and acquisitions of upstream suppliers will remain a theme in the People’s Republic, S&P said in a report issued in March.

“The dairy producers we rate in Greater China will likely be able to maintain margins by increasing imports as domestic raw milk prices rise, improving product mix, and moderately increasing prices,” said S&P Global said.

Fonterra’s NZX-listed units last traded at $4.88, down 5c on the day.

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