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Next Steps In Australian Growth Strategy

June 7, 2005

Fonterra Takes Next Steps In Australian Growth Strategy

Fonterra Co-operative Group Ltd has signalled its intention to be a leading player in the Australian dairy industry by consolidating all its interests in Australia under the Fonterra name and further expanding its milk collection and processing capacity.

Fonterra's consumer products companies in Australia - Bonland Dairies in Melbourne and Peters & Brownes in Perth - are being consolidated under Fonterra Brands.

Fonterra Chief Executive Andrew Ferrier said that consolidating the consumer businesses would create a strong foundation for future growth.

"Bringing our Australian consumer businesses together will enhance our business objective of growing our branded consumer dairy business, with a strong Australasian base."

Fonterra's brand portfolio in Australia includes Mainland, Bega, Perfect Italiano, Western Star, Brownes and Peters.

Expansion in Fonterra Brands will include the acquisition of Murrumbidgee Dairy Products (MDP) - the liquid milk, desserts and yoghurt company based in Wagga Wagga - formerly owned by Bonlac Foods Limited (BFL). This brings the Riverina Fresh brand portfolio into the business. Fonterra's intention is to grow the MDP business.

At the same time, Fonterra has moved to strengthen its position as a purchaser, processor and marketer of milk in Australia, replicating its successful cow to customer supply chain in New Zealand.

As part of this, Fonterra is seeking to move from 50 per cent to full ownership of BFL, a move supported by the Board of Bonlac Supply Company (BSC), its joint venture partner, but still to be ratified by BSC shareholders.

Fonterra will acquire Nestlé's plant at Dennington on Victoria's south west coast and integrate this into its dairy manufacturing business, along with the BFL plants. As part of the agreement, Fonterra will take over the collection of milk from around 420 farmers in Victoria who currently sell their milk to Nestlé and will manufacture a range of powdered milk products for Nestlé in Australia. Nestlé is one of Fonterra's large global customers and this relationship builds on that partnership.

Fonterra will take over the Dennington plant from the start of August and begin a process to transform it into a world class, milk powder manufacturing plant. Fonterra will integrate Dennington with its other facilities to maximise economies of scale and ensure optimum product mix across its plants. After a transition period of up to five months, employees at Dennington will become Fonterra employees on January 1, 2006.

Mr Ferrier said Fonterra is committed to retaining the support and loyalty of suppliers to its plants in Victoria, Tasmania, New South Wales and Western Australia by paying a competitive milk price and delivering quality services.

The transition to Fonterra will be seamless for farmer suppliers, allowing them to continue with business as usual.

He said the changes Fonterra was making to its businesses reinforced its commitment to its Australasian base.

"We are consolidating and strengthening our businesses in Australia because we believe that there is a significant opportunity for the Australian and the New Zealand dairy industries to work closer together to compete more aggressively in the global marketplace.

"For this to happen, however, we need a stronger presence in the Australian dairy industry.

"Four years ago we started down this path with our joint venture arrangement in BFL. We set out to reduce costs, improve the product mix to create greater scale and efficiencies, and to participate in industry rationalisation. Today, we have reduced costs by $40 million and achieved a better product mix across BFL's plants which are returning higher revenues to the operation. However, the industry remains significantly overcapitalised.

"We are taking these steps now to begin the process of leading the rationalisation required to build efficient production, a strong domestic branded business and a globally competitive sector.

"These changes underline our commitment to maintaining robust and sustainable businesses in Australia's dairy sector that are internationally competitive and which allow everyone in the production chain to make money - farmers, dairy companies and retailers."

He said that Fonterra's move to gain 100 per cent of BFL would give BFL's 1,500 farmer suppliers more stability than they have today.

"We have made good progress and achieved what we set out to achieve, but BFL remains hampered by drought-affected milk supply and is not in a position to make further investments.

"The best solution is for BFL to be fully integrated into Fonterra's operations. By taking 100 per cent ownership of BFL, we can further reduce BFL's costs, establish a stronger balance sheet, make further investments in the business and create greater scale and efficiencies," Mr Ferrier said.

Chairman of Bonlac Supply Company, Noel Campbell, said that Fonterra's offer was in the best interests of BSC suppliers.

"It will provide suppliers with improved returns on their investment, greater stability and security, and a better long term competitive outlook.

"I am quite confident that this offer delivers a number of significant benefits leading into the future," said Mr Campbell.

Fonterra, through BFL, is offering BSC Capital Notes in exchange for its shares in BFL. The Capital Notes, in conjunction with milk price, will give suppliers returns matching those from competing co-operatives.

The details of this offer will be outlined in an Explanatory Memorandum that will be sent to suppliers in the coming weeks. There will also be a series of meetings where suppliers can ask more questions about the offer before voting on the proposal.


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