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Parmalat Not Buying, But Goodman Dairy Exit A Good Idea: Analyst

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Fuseworks Media
Fuseworks Media

Wellington, Jan 20 NZPA - Fonterra has such a dominant position in domestic dairy sales that its main rival, Goodman Fielder's fresh dairy business, is struggling to compete, says an investment analyst.

Goodman Fielder's lack of success against Fonterra with the Tararua, Puhoi Valley Cheese and Meadow Fresh brands has attracted attention after an Italian daily La Repubblica said in an unsourced report on Saturday that Goodman's fresh dairy operation might be bought by Parmalat SpA.

The newspaper said Parmalat had hired investment bank Mediobanca SpA to study a possible bid for the Dairy Fresh unit, originally held by New Zealand billionaire Graeme Hart but the Italian company today told Reuters newsagency that it was not interested in buying the dairy business from Goodman Fielder.

The speculation shone a spotlight on the potential for sale of the New Zealand dairy business to earn Goodman more than $NZ626 million -- if it can find a suitable buyer.

Goodman Fielder's fresh dairy brands in New Zealand accounts for about a sixth of group revenue.

Goodman acquired the unit in December 2005 for $A830m ($NZ1039m). Since then, earnings have halved and it has taken a $A170m writedown.

One international analyst, Andy Bowley of Citigroup Global Markets said in a report: "At the right price we would welcome an exit from fresh dairy".

"Goodman Fielder's dairy business is poorly-placed strategically," he said. "Fonterra acts as both its only supplier and only major competitor."

And the existing regulatory protection under the Dairy Industry Restructuring Act for its access to 600 million litres of milk annually from Fonterra at cost price was likely to end over the next four to five years, he said.

The company does not have its own network of farmer suppliers to match Fonterra's 10,000 farmers.

Mr Bowley calculated the business was worth $A350m-$A500m based on 7 to 10 times forecast fiscal 2009 earnings of $A50 million before interest, tax, depreciation and amortisation (ebitda).

"We see upside potential to this range given trough cycle ebitda and the potential for Japanese interest," Mr Bowley said.

Earnings at the dairy unit fell 32 percent even while revenue rose 19 percent last year as commodity prices hit a record, pushing raw milk costs up 60 percent and prompting some customers to move to cheaper brands as the economy slowed.

Goodman shares hit a low of A$1.05 a month ago but have been trading about 50 percent higher than that recently -- at NZ181c on the NZX today.

Citigroup analysis also expressed concern about the increasing ship in NZ's fresh dairy chillers to private label milk products.

It said that while Goodman Fielder's other operations might wind up incurring extra costs if the company were to exit the dairy business, the strategic benefits of divesting such a "challenged" unit would offset those costs.

Lindy Newton, an analyst at UBS, said the dairy unit had been "a pretty bad performer" for Goodman.

"Depending what they got for it, it could be accretive to get rid of it. So that could be a positive for Goodman. It totally depends on the price," she said.

Nick Berry, analyst at ABN Amro also said a sale might make sense: "It would be an opportunity to get out of a business where they are always going to be sub optimal in terms of market share -- a case of if the price is right, getting out of a tough business.

"They haven't got anything like the returns they would have hoped to when they bought it," he said.

Claudio Giacomello, analyst at Banca Akros, said other potential bidders might include Kirin and France's Group Danone SA, as well Singapore's Olam International Ltd and Canada's Saputo Inc, which both showed interest in Dairy Farmers.

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