Fonterra abandons merger with Nestlé in Chile

Fonterra has baled out of a proposed merger of its 99.8%-owned Chilean subsidiary Soprole, with Nestlé, the world's largest food group.

Auckland-based Fonterra Co-operative Group -- the world's biggest dairy exporter -- said today Soprole "had withdrawn a proposal to merge its business with Nestlé Chile's liquid and chilled dairy business."

Fonterra chief executive Andrew Ferrier said Soprole and Nestle Chile had agreed to withdraw the application.

"The parent companies Nestlé and Fonterra assessed the conditions to continue with the application were not appropriate," he said.

But local media in Chile said that the proposal for Fonterra and Nestlé to create a 50:50 joint venture DPA Chile had generated considerable resistance from Chilean dairy farmers and politicians. The resistance pivoted on concerns that the merger would hurt domestic milk consumers, damage competition among companies in Chile's dairy sector, and especially affect dairy farmers.

At home in New Zealand, Fonterra is facing a similar controversy over milk prices in NZ supermarkets, and criticisms of its dominance of milkflows in this country, with the Commerce Commission looking into whether the issues require a full-blown investigation.

In Chile, a powerful grouping of a dozen senators to the agriculture committee of Chile's Senate of recently presented a draft agreement to categorically reject the merger.

The text, which had not yet been submitted for consideration by the Senate, argued that the merger would cause serious harm to domestic, damage competition among companies in the sector and negatively affect dairy farmers.

Chile's Agriculture Minister, Jose Antonio Galilea, earlier this year criticised the proposed merger and said that an "excessive concentration of certain industries" would naturally end up affecting producers. Mr Antonio Galilea noted issues related to unfair competition and transparency.

Chile's National Economic Prosecutor, Felipe Irarrazabal, said the merger "in the opinion of this office" was not positive and mitigation measures were not sufficient to offset the risks involved.

The president of the National Federation of Milk Producers in Chile, Dieter Konow, warned that a company such as Soprole, which controlled more than about 60% of the market, was "free to set the prices for both sales and purchases of dairy products [...] it is not good to a social market economy."

Soprole and Nestlé Chile applied in late November to the Court of Free Competition in Chile (TDLC) for a ruling on the merger, which they claimed would increase milk consumption in Chile by promoting and expanding the product categories the two companies sold.

In much of Latin America, Fonterra has been managing its investments through Dairy Partners America (DPA) joint venture with Nestlé, which operates 13 manufacturing sites in Brazil, Argentina, Venezuela, Colombia and Ecuador These are separate to Soprole, in Chile.

Mr Ferrier said Soprole would now focus on continuing to grow its consumer business in Chile.

"Soprole already has a very strong position in the Chile market and has been posting strong growth in recent years. The team is now focused on building on that strong foundation."