Fonterra sold Tip Top to Froneri in 2019.
Four years after Froneri acquired Tip Top from Fonterra for $388 million, it seems that it might not have been such a sweet deal.
Latest accounts from Froneri - a joint venture between Nestle and PAI Partners - show that while revenue was up by $11m to $169.48m in 2022, its net loss increased from $2.56m in 2021 to $4.7m in the year to December 2022. And the loss before tax was $6.696m, up from a loss of $3.484m.
Before the sale, Fonterra said it was selling the business because it had reached maturity as an investment for the co-operative.
“To take it to its next phase successfully will require a level of investment beyond what we are willing to make,” Fonterra said.
Marketing material for the sale noted six investment highlights, including opportunities to “leverage Tip Top’s brand portfolio in selected export markets”.
In 2018/19, exports made up only about 10 per cent of sales.
But the Froneri accounts show Tip Top has struggled to make inroads on this front.
In 2022, exports made up just 7.4 per cent of the revenue mix, only slightly better than the 6.1 per cent in 2021.
Maybe that is a Covid effect, but it seems the new owner has brought very little to the table.
And on top of that, it has written down the value of two key brands.
An impairment of $10.625m was recognised against the Kapiti brand as of December 2020. “Further review of the Kapiti and Tip Top brands in the 2022 year resulted in further impairment of the Kapiti brand by $4.15m and $13.253m on the Tip Top brand.”
Intangible assets have fallen from $271.9m in 2019 to $245.56m in 2022, while total equity has fallen from $152m in 2019 to $138m.
Last week, dairy and infant formula maker Synlait Milk announced plans to sell its Dairyworks and Talbot Forest Cheese businesses to pay down debt.
Synlait chief executive Grant Watson said Dairyworks - which was bought for $112 million in 2019 - was not core to Synlait’s strategy.
“Despite having extremely strong capability across consumer, brand, customer and procurement, Dairyworks is not core to Synlait’s diversified growth strategy and does not leverage our core right to win competencies in advanced nutrition and food service.
“Synlait needs to focus on the business units where we have a clear right to win.”
But could a potential buyer of these assets see an opportunity to also approach Froneri and roll them up together? Or taking it a step further, could they also be combined with Fonterra’s consumer arm to make a super-exporter?
Investment bankers will no doubt be eyeing up all the options to make a deal as attractive as possible for a buyer.
Analysts have so far been reluctant to give much of a view on Infratil’s offer to buy Brookfield’s 49.95 per cent stake in One NZ (formerly Vodafone NZ).
But Jarden has ventured a view on the deal, which will cost $1.8 billion. Based on estimates by analyst Nevill Gluyas, they say full value looks to have been paid for the stake.
“Against nearest comparator Spark, the purchase price looks broadly in line with the current trading multiple but modestly above our DCF (discounted cashflow) estimate.”
Gluyas said in a note released yesterday that while a large digital acquisition had been hinted at for some time, he had expected this to be offshore.
The deal will be funded by an $850m equity raise, with the remainder funded from Infratil’s cash and debt facility drawdown.
The equity raise included a $750m institutional placement which was done on June 7 at an 8.9 per cent discount to the $10.10 share closing price prior to the deal being announced, and a $100m retail offer is due to open on June 13 and close on June 27.
Gluyas said after this deal Infratil retained gearing headroom but he did not expect another large digital platform acquisition.
“Management would not rule out further digital investments but this is now more likely to be smaller scale/earlier stage and offer higher growth than Infratil’s projected 10-12 per cent equity return from One NZ.”
Instead, Gluyas said he expected the bulk of Infratil’s dry powder to be directed at expanding its existing renewables vehicles Longroad, Galileo, Gurin and Mint.
Gluyas forecasts a doubling of One NZ cash distributions to Infratil on top of earnings growth.
“Our One NZ modelling indicates $100m-$175m per annum of free cashflow generation by the telco.” A full dividend payment was not expected until the 2026 full year, he noted.
Jarden was unchanged on its rating, at overweight with a target price of $10.40.
Forsyth Barr is unable to give a view on its rating and target price due to being the joint lead manager on the capital raising.
Ratings agency Fitch has downgraded its outlook on the New Zealand and Australian banking sector from neutral to deteriorating.
The change in view is based on the greater impact that weakening economic activity will have on bank credit metrics in the second half of the year.
“We have modestly revised down our 2023 economic growth forecast for New Zealand, to 0.8 per cent at present, from 1 per cent in December 2022. Our forecast for Australia remains unchanged at 1.5 per cent.”
Fitch noted the Reserve Bank of New Zealand had been more aggressive than the Reserve Bank of Australia in its tightening cycle and seemed more willing to tolerate the risk of recession.
“Fitch expects the increase in unemployment in New Zealand to be larger than that in Australia this year, which suggests risks to asset quality will be greater in New Zealand.
“Nonetheless, the labour market deterioration so far has been modest relative to previous shocks. Moreover, macroprudential limits on loan-to-value ratios should limit bank losses and the starting point for asset quality in New Zealand is even stronger than in Australia.”
Fitch said it expected individual bank ratings to be resilient to the weaker outlook.
“However, in both countries, the risk of a sharper-than-expected economic slowdown and higher unemployment remains a key threat for bank metrics, particularly if this were to push house prices lower than we project. The household sector is highly indebted in both countries, increasing its vulnerability to economic shocks, even if risks are mitigated by solid underwriting and households’ savings buffers.”
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