Speculation is rife over who might buy Fonterra’s assets in Chile and while the devastating impact of climate change and political uncertainty may weigh on the price, local farmers seem to be keen.
Fonterra said last month it’s looking to sell its Chilean assets and might float its Australian business in an initial public offering return. It also said it will look to return $1 billion of capital to shareholders.
The head of the Chilean dairy producers’ union Fedeleche Marcos Winkler told a Chilean radio station the sale represents an enormous opportunity for the sector.
“We are hopeful it can be bought by the farmers themselves,” Winkler said.
“We are working hard to see if we can raise the necessary funds to buy it. The development of the country needs to be through cooperatives.”
Fonterra declined to comment on whether it was negotiating with any parties.
Fonterra’s investment in Chile dates back to 1986 when the New Zealand Dairy Board bought a 51% stake in Soprole. Prolesur was created in 1990 as part of a restructuring.
The two units were merged into one earlier this year and combined they are Chile’s second-largest milk processor with a 20.7% market share, according to Fedeleche.
The largest is the Colún co-operative, with 29.5% of the market while Nestlé has 17.9%.
Fonterra owns 99.9% of the company but has said the operations do not require any New Zealand-sourced milk or expertise.
It has not yet named an investment bank for the operation and also declined to comment on a possible valuation.
One financial entity estimates it could be worth US$800 million, while another said it would be around 15-to-20 times earnings, which would put its value at about US$400m to $600m.
“Here in Chile there’s a lot of speculation about how much it’s worth, who could buy it, but the real question is what is the real challenge,” said one farmer.
“The real challenge is that the company that comes in has to be willing to work with farmers to confront climate change. This reduces the number of people who might be interested,” he said.
“Whoever buys the company will need resources for this.”
Huge swathes of the country – including rich agricultural areas – are grappling with the impact of a decade of drought.
The latest data from the country’s weather service shows that the area where he farms – a key dairy area – shows rainfall is currently down 45.6% on the year while another major dairy area has a 38.7% deficit. Rainfall was already low.
He says the real question is how well is Soprole prepared to confront the new challenge of climate change.
“I think this is the most relevant, as Fonterra leaves Chile,” he said.
Economist Jorge Fantuzzi, a partner at financial consulting and management firm FK Economics, agreed the drought was a major issue given the challenges for the dairy sector.
However, he says “on the other hand – and perhaps equally important – is the political-economic issue”.
Chile is currently redrafting its constitution after a raft of social protests began in late 2019 that saw millions take to the streets.
Tensions only abated after the Government promised to elect a constitutional assembly to rewrite a constitution that dated back to 1980 when military dictator Augusto Pinochet was in power.
“The level of uncertainty is enormous,” Fantuzzi said .
“It is leading investors to leave rather than enter. Finding a buyer of this magnitude will be difficult given the economic, political context.”
Also, Chile will hold general elections in November and 35-year-old leftist Gabriel Boric, a former student leader, is currently leading the polls.
His swift rise in the polls is part of a shift left across many Latin American countries and is adding to the uncertainty as Chile has long been seen as one of the most market-friendly countries in the region by international corporations and investment firms.
Fantuzzi has no doubt, however, that Soprole is attractive.
“This is a company that is extremely important in Chile,” he said pointing to its historic capital, relationship with suppliers and highly recognised brand.
Fonterra noted in its annual report that its Latin America business is predominantly the consumer business in Chile.
“The performance improved significantly on the prior year with ebit lifting 79% to $75 million,” it said.
However, Fantuzzi says the drought and the economic-political backdrop may mean “there is less willingness to pay” and the “price isn’t what it would have been 10 years ago”.
Other analysts agree interest will be high.
“There could be a number of interested candidates both inside and outside of Chile,” Monica Ganley, principal for Quarterra Consulting & Advisory in Buenos Aires, said
The company is an “interesting target, particularly for anyone wanting to get their feet wet in Latin America”.
Regarding possible buyers, Fantuzzi says an existing producer, such as Nestlé, would run into difficulties because of rules around free-market competition.
He noted there are already issues with market concentration given there are three large producers.
Fantuzzi says given the size of the operation, the regulator would need to be consulted and it is unlikely to approve any increase in concentration in the market.
As a result, he says, a buyer could be an international company that doesn’t have a presence in Chile, or Chilean or international investors that aren’t in the sector but want to take advantage of what Soprole has to offer to have a new business.
Meanwhile, Soprole says it is business as usual.
“We know the future could include a new shareholder. However, Soprole will continue to strengthen its leadership in Chile,” board president Hugo Covarrubias said.
“The company will continue its strategic, organisation and operational activities to maintain the position it has in the market.”
Business Desk
