Fonterra units drop after Danone launches legal action, ends contract

Thursday 9th January 2014

Units in the Fonterra Shareholders' Fund fell after French food processor Danone ended its supply contract and launched legal proceedings against the New Zealand dairy exporter.

The units fell 1.5 percent to $5.77 after Paris-based Danone said it is initiating proceedings in the New Zealand High Court and arbitration proceedings in Singapore against Fonterra Cooperative Group "to bring all facts to light and to obtain compensation for the harm it has suffered." The French company will file papers in the High Court in Auckland today and has already served the arbitration papers.

Last August, Fonterra quarantined several batches of whey protein concentrate amid fears it was contaminated with a potentially dangerous form of the clostridium bacteria. The whey protein was

ultimately cleared as a false alarm.

Danone will also terminate existing supply contract with Fonterra Cooperative Group and make "any further collaboration contingent on a commitment by its supplier to full transparency and compliance with the cutting-edge food safety procedures applied to all products supplied," it said. Fonterra has yet to comment on the proceedings.

The French company put the cost of last year's WPC 80 recall at 350 million euros when it announced its third-quarter results, while Auckland-based Fonterra recognised a contingent liability of just $14 million in its own accounts.

"It's hard to know at this point how much of a claim by Danone is real and how much is negotiating tactics," said Matt Goodson, managing director at Salt Funds Management. "At the moment this is a very news story driven equity market."

Of the eight customers affected by Fonterra's recall, the New Zealand company agreed to a commercial outcome with all of them except Danone, including extending supply contracts for the next 10 years and agreeing to volume increases.

In December, Fonterra chief executive Theo Spierings said he expected any court action would show the New Zealand company has no liability in its contract.

Salt Funds' Goodson said he has been struggling with the fund as an investment as Fonterra has had to contend with an unfavourable product mix where rising prices in whole and skim milk powders haven't been matched with manufactured products such as cheese.

"We really need to see a reversal with those markets for the fund to benefit," he said.

Last month Fonterra cut its dividend forecast to 10 cents a share from 32 cents while keeping the milk price at $8.30 a kilogram of milk solids, even though its calculations showed the price should rise to $9 per kgMS.

BusinessDesk.co.nz

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