Fonterra takes firm grip across the Tasman

Fonterra has combined its New Zealand and Australian domestic businesses with those of Victoria-based Bonlac, which owns the famous brands.

Fonterra will own three-quarters of the new entity -- Australasian Food Holdings (AFH) -- while Bonlac will have an 11.4 percent interest, and the AFH management will report to head office in New Zealand.

The Sydney Morning Herald reports that Fonterra is now expected to cast its eye over the country's biggest and most profitable dairy company, National Foods.

It already owns almost 18 percent of National Foods and has received advice that a $A1 billion ($NZ1.15 billion) takeover would not be barred on competition grounds, the newspaper reported.

Buying National Foods would give Fonterra an Australian milk brand, Pura, as well as King Island Cheese, Fruche dairy dessert, Big M flavoured milk and Yoplait yoghurt in Australia.

Already, with the Bonlac deal, Australasian Foods' portfolio of brands will include Australian household names such as Mainland, Bega and Bodalla cheese, Western Star butter, Tip Top Ice Cream, Cadbury Ice Cream, and Meadowfresh.

It will have annual sales of $2 billion, employ 4000 people, and have a large product range covering milk, ice cream, butter, yoghurt, processed meats and convenience foods.

The new merged company will compete directly with Dairy Farmers, which two years ago fought off a takeover bid from Italy's Parmalat. The Italian company trades under the Paul's banner in Australia.

"This creates a stiff competitor domestically for all the dairy companies," one Australian analyst said.

Fonterra chief executive Craig Norgate has left open the possibility of floating the business on the sharemarket.

"We wouldn't exclude options in the future that might include public equity," Mr Norgate said.

Some analysts have pointed to statements from Fonterra in other contexts which suggest that in the fast-moving high-value consumer-branded markets it wants to become big enough to be a category manager for multinational supermarket chains.

Control of supermarket chiller cabinets in affluent markets could give Fonterra's farmer shareholders in New Zealand a chance to counter falling commodity prices -- farm gate prices in Australia are down 25 percent from a year ago as major economies, the US in particular, have slowed.

"The outlook going forward is not all that encouraging in the short term," Bonlac chief executive Peter Myers said. But he said, "we're hoping there will be a turnaround in the near future".

There are concerns among some Australian farmers that Bonlac may sell its share of the merged company to Fonterra to reduce its debts.

An agreement is already in place to allow Bonlac to force Fonterra to buy its interest. Other minority shareholders in the merged group have similar agreements. If they were to sell, it would leave the New Zealand group with full control of some of Australia's best known dairy brands.

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