Richard Inder: Hart skims the cream off Fonterra for a second time

Richard Inder: Hart skims the cream off Fonterra for a second time

Fonterra was brave to take on negotiations with billionaire Graeme Hart again, especially after the dairy giant came out on the wrong side of the deal struck when they last met - the sale of a half-share in New Zealand Dairy Foods in 2002.

But as details of the impending flotation of Goodman Fielder emerge that suggest Hart may have got the better of Fonterra for the second time, the cooperative may want to examine why it was so daring.

The value lost on this first deal was spectacular.

The half-share Fonterra sold in NZDF in 2002 implied a value for the whole business of $310 million. In August of this year Hart and Fonterra met at the negotiating table again. Fonterra agreed to buy back most of the assets it had sold to Hart for $754 million. It paid with $338 million in cash and contributed assets including the Meadow Fresh beverages, yoghurts and milk business, the Kiwi and Huttons meat business and an extensive distribution network.

The result: Hart booked a gross profit of at least $444 million and probably more as he retained the Anchor cheese and Puhoi dairy business.

Fonterra justified this deal on the following grounds. It had always found it hard to accept that it did not have the rights to one of its most important international brands - Anchor - in its home market. It believed there were gains in revenues or cost savings from owning the brand here as well.

It also said the market-leading Fresh'n Fruity, Metchnikoff and De Winkel yoghurt brands and the Country Goodness cultured dairy products came with intellectual property that could not be replicated in the brands it sold to Hart.

This included knowledge of dairy cultures, production processes, understanding of the market and certain brand values.

It now seems Hart reckons Fonterra's view was flawed.

He has since struck a deal to sell the Meadow Fresh and other assets acquired from Fonterra to his Australian food company Burns Philp. These will then be merged with Burns Philip's baking, spreads and oils businesses floated on the New Zealand and Australian exchanges.

Sources now say a key attraction of the flotation will be the very assets Fonterra sold. Indeed in the words of one source the concerns Fonterra had about the assets "have disappeared".

The latest figures on the impending float appear to confirm this. Of the assets to be included in the new Goodman Fielder, the ones coming from Burns Philp are easier to value. They have a history on the sharemarket and their earnings and sales have always been well displayed in the Burns Philp annual report.

Analysts have estimated a debt-free value of these business between A$2.1 billion ($2.28 billion) and A$2.5 billion. Taking the mid-point of these values the business is worth around A$2.3 billion.

However, Burns Philp is now aiming for a debt-free valuation from A$2.6 billion to A$3.4 billion. Taking the mid point of this range - A$3 billion - suggests the assets Hart is contributing to Goodman Fielder will be valued by the flotation at around A$700 million.

Just to be clear: most of the assets, valued in August at $416 million, are to be sold to investors for $760 million (New Zealand dollars).

Puhoi is simply not worth the difference of $344 million.

One should be sceptical of these numbers.

It may well be that Hart's willingness to sell such newly-acquired assets demonstrates a lack of faith in their prospects.

Cost cuts such as a rumoured 10 per cent cut to the asset's 1700 staff may be the only potential he sees in the business. Every dollar Hart can deliver to the bottom line is worth as much as $9 on the operations' market value.

Fonterra had an excuse when it first sold its half stake in New Zealand Dairy Foods. At the time it was in the middle of extracting the benefits from the merger that created it - the combination of the Waikato-based New Zealand Dairy Group and Taranaki's Kiwi Cooperative.

The sale was also struck under pressure. The merger made Fonterra the dominant player in the domestic dairy market so the Commerce Commission demanded the sale of assets.

Fonterra had only a half-share of Dairy Foods and would have faced an acquisition to give it full control. This would have been more than possible, but given all the other hurdles it was facing at the time it was an added complication.

This time Fonterra does not have that luxury. Even if Hart's gain is just half the sum anticipated by Burns Philp - say $170 million - Fonterra's near 12,000 farmer shareholders will be right to ask some hard questions of their chairman Henry van der Heyden and chief executive Andrew Ferrier.