BAL becomes takeover target now

http://www.theaustralian.com.au/bus...t/news-story/39c3b6c65c0e69941c9c926c88e7d5cb

Bellamy’s could become takeover target

• The Australian
• 12:00AM January 12, 2017
• 
  Reporter - Rural/Regional Affairs
  @BushReporter
  

Australia might like to pretend it is a mighty player in the booming agricultural and food space, but just how intertwined the fortunes of its relatively small players are has been starkly exposed.

Bellamy’s resurrection — and freedom from some ambitious locked-in supply deals that had shaken its financial foundations — depended entirely on the benevolence of two of the biggest dairy corporations in Australia, New Zealand giant Fonterra and Australia’s Bega Cheese.

Both companies make infant formula mixes under contract for Bellamy’s, using organic milk powder sourced mainly from Europe and then blended with canola oil, vitamins, micro-minerals and other nutrients to make infant formula and toddler milk powders that closely mimic the composition of breast milk.

Bega, through its Tatura Milk subsidiary — which holds the all-important Chinese infant formula import licence that Bellamy’s uses for its products — has been making the organic mixes under contract since the Launceston-based company’s early days a decade ago.
Fonterra, which has built a $300 million nutritionals plant at Darnum, near Warragul, east of Melbourne, especially for the manufacture of its own and other contract infant formula mixes, was due to start supplying Bellamy’s this month.

After its ASX float more than two years ago, Bellamy’s realised one of its weaknesses was that it was reliant on just one powder supplier, Bega, which had also just entered into its own joint venture with Blackmores to supply infant formula to the China market.

With China’s demand for Australian dairy products surging, Bellamy’s became almost obsessed with locking in enough supply of infant formula from diverse sources. It wanted to ensure it could continue to meet its China orders and not have a repeat of local “daigou” Chinese buyers and university students stripping supermarket shelves around Australia to send powdered milk tins to relatives and wealthy customers in China, as seen in late 2015.

Bellamy’s chairman Rob Woolley denied the company had become so hungry for organic milk powder and supply deals that it had forgotten sales could go down as well as up, especially in such a manipulated market as China.

But now it has more than $110m of infant formula sacks sitting in warehouses in Melbourne — Bellamy’s insists they can be sold without price discounting — and wriggling out of its expensive take-or-pay deals with Bega and Fonterra became imperative if Bellamy’s was to survive in a sluggish sales environment.

Details of the contracts remain obscure. It appears Bega and Fonterra have agreed to supply less nutritional product in the short term, despite binding contracts, with Woolley admitting Bellamy’s will have to pay a combined $11m-$13m in shortfall or penalty payments to both companies at least for the next two years.

But just how dependent Fonterra and Bellamy’s are on each other was apparent yesterday. We know Fonterra’s Darnum manufacturing plant is grossly under-utilised to dry and blend the 300 million litres of milk it sources annually from about 200 local farmers around Gippsland. It needs the Bellamy’s deal — even at a lesser cost and throughput — as much as Bellamy’s needs Fonterra.

Yet the big processing factory at rural Darnum is also not really Fonterra’s. It is 51 per cent owned by Chinese infant formula company Beingmate — which has the right to take half its annual 50,000 tonne output. In turn Beingmate, the private Chinese company that has 1000 stores in China and a key 10 per cent share of its $18bn infant formula market — is 18.8 per cent owned by Fonterra.

All of this entanglement is what makes the supply termination clauses inserted in the renegotiated Bellamy’s deals with Darnum and Fonterra more intriguing.

Fonterra — or perhaps Beingmate — insists that Darnum can pull out of its eight-year supply contract with Bellamy’s with just a year’s warning, if “effective control” passes to any other body, company or group of investors that owns more than 30 per cent of its shares. Bellamy’s insists this clause was not inserted at its request, or to ward off an impending board takeover threat from Tasmanian rebel shareholder, Jan Cameron, and her 35 per cent share-owning group of friends.

Fonterra tried to dismiss the clause as normal. It claimed it was about the company wanting to defend its integrity and not being forced to supply substandard, non-food-safe products from dubious sources to any customer, including Bellamy’s, under new ownership.

But the clause intrigues. Is Fonterra worried that Bega, which has long wanted its own export brands, might launch a bid for Bellamy’s, and not want to be forced into supplying a key competitor with its nutritional powders?

Or is there another rival on the scene like Canada’s global giant Saputo? It won the fierce bidding war for Warrnambool Cheese & Butter two years ago, but doesn’t have a foothold in making or selling infant formula to China yet.

Or is a Chinese mega-corporation — think of a group like Mengniu Dairy Company that this week bought the largest dairy farming group in China for more than $US1 billion — interested in acquiring Bellamy’s?

Stay tuned for takeover action.