Fonterra to ‘vigorously defend’ Danone claim, units fall

Fonterra CEO Theo Spierings
Fonterra Shareholders’ Fund 12-month price history (NZX.com)

Fonterra will "vigorously defend" a claim by French food processor Danone over last year's recall of whey protein concentrate.

The Auckland-based company is working through Danone's claim after negotiations for a commercial settlement failed. The French company will file papers in the High Court in Auckland today and has already served the arbitration papers to be heard in Singapore.

Fonterra "continues to be confident in its position and will vigorously defend any proceedings," it said in a statement. "Fonterra stands by its track record of having world-class food safety and quality standards, quality systems, and robust testing regimes across all its manufacturing facilities."

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.

Units in the Fonterra Shareholders' Fund [NZX: FSF] fell 2.1 percent to $5.74 on news of the action.

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.

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 kg/MS.

(BusinessDesk)

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Another great French solution - buy more from elsewhere reducing the availability of product to others probably increasing that supply price whilst releasing their previous purchase volumes for others - obviously taken the cue form their Presidents lead in economics after all France is different! Probably means France will become the last European economy to recover.

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You just hate to say it, but if you look at history the French have always cried wolf.. Yes there was a problem but NZ$575 million?, please.

This is more building Danone’s balance sheet for the CEO bonus this year.

I suspect it will be difficult to quantify the loss they are claiming, but the lawyers will not mind, it’s a great start to 2014 for them

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$15 billion market not impossible to have a claim of $500m to be honest. Lost sales as product removed from shelves, reduced sales from on going concerns, additional mgmt time and marketing etc.

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At the risk of being shot down in flames, our business does a lot of business with Nutricia NZ and we have always found them to be more professional, reasonable and collaborative than most of the kiwi companies with which we deal. The local business and people have been adversely affected by this whole debacle.

If you look at their latest 2011 financial statements you'll see the balance sheet carried M$27 in inventory (which no doubt increased and needed to be dumped) and a M$50 before tax profit was declared. Since August they have retained and retrained all staff without any revenue and there is serious ongoing damage to the brand.

Fonterra's contingent liability of M$14 is a joke and a typical reflection of the arrogance of the giant it has become.

I say good on Danone for holding Fonterra to account. M$575 may be on the high side but at least they have the gonads not to be bullied into submission.

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Duh - private negotiations have failed so now a public one through various court filings. Danone will have an international legal team & top externals - dont forget who got it wrong here & the value of real brands. Long way till fat lady sings & will be a (sealed with no admission of fault) on court steps deal to avoid dirty laundry day

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Re the comments above, I fail to see what this has got to do with France?

This is a simple commercial dispute between two companies where one is saying that the incompetence of the other has needlessly cost it a lot of money. The only issue I see here will be the eventual size of the award that Danone extracts from Fonterra, as it was Fonterra that stuffed everything up.

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The French will deploy the best litigation brains in the world. After costs are awarded, Fonterra's tab could be closer to $700mil. The burden will fall on farmers and heads should roll.

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What is really important is the wording of the supply contract between Fonterra and Danone. If it rules out consequential loss, then there is a good chance that Fonterra will win.

Most supply contracts do not include for consequential loss.

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Apart from the cost of stock damage, there has been a lot on emotional damage to people working in NZ as there were an upward of 100 roles made redundant due to the disrepute caused to Nutricia NZ and decrease in demand of there most consumable products.

Fonterra should have more sensitve and sensible approach to this whole scenarior rather than looking at a $ figure. I think thats utter arrogance. There will be a lot of eyes rolling if the brunt comes down to the farmers who work night and day to get it right everytime for Fonterra.

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$14m is 1 cent of payout
Claim is initial $ only so will but only increase. There is also all other parties sold to to lump in their claims $1b+?
Years in court will cost a lot + challenge some brand values

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Danone is one of the many companies damaged by Fonterras actions so the cost in dollars and reputation is going to be a lot more than the 575 million plus costs either way.

Interestingly you never see other competing Milk companies of Fonterra like Nestle, Danone etc getting continually involved in food scandals. Maybe there is something wrong here. The rot could be quite deep.

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i am more surprised by the minimal contingent liability applied to the books by Fonterra - either someone knows something or it smells of arrogance. I would suggest the legal bill for Fonterra alone will be more than what they have set aside

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Fonterra is a dinosaur that is out of touch with its own industry on many levels.

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