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Danone Cancels Contract With Fonterra Over Botulism Scare

January 9, 2014

Danone sued in the New Zealand High Court and is seeking arbitration in Singapore after an estimated loss of $407 million of free cashflow as a result of the Fonterra recall.

Danone, the world’s biggest yogurt maker, canceled its supply contract with New Zealand’s Fonterra Cooperative Group Ltd. and said it’s seeking compensation for last year’s product recall over a contamination scare.

Danone said it sued in the New Zealand High Court in Auckland and is seeking arbitration in Singapore after an estimated loss of 300 million euros ($407 million) of free cashflow as a result of the recall, triggered when Fonterra warned some milk powders may have contained botulism-causing bacteria. Danone said it’s making any further contracts with Fonterra contingent on "full transparency" and respect of safety procedures the company requires of suppliers.

Fonterra, the world’s biggest dairy exporter, said in August that a whey protein used in baby formula may have been tainted with a potentially fatal bacteria. The incident prompted product recalls across Asia, and nations including China temporarily halted imports of some Fonterra milk powders.

"Danone might face some additional input cost pressure from switching suppliers in the short term," Andreas von Arx, an analyst at Helvea, said today in a note. The costs of the recall are already taken into account in analysts’ earnings estimates, he said.

Supply Agreements

The stock fell as much as 0.9 percent to 50.73 euros, the lowest price in two weeks, and traded at 50.80 euros at 1:13 p.m. in Paris, giving Danone a market value of 32.1 billion euros. Total damages are still to be determined, the company said.

China Mengniu Dairy Co. could replace Fonterra as a long- term supplier to Danone, according to von Arx. The maker of Activia and Oykos yogurts agreed to invest 325 million euros in a partnership with the Chinese company announced in May.

"This affair caused serious damage to the Danone business," spokeswoman Eliza Newton said from Sydney. In addition to the direct losses, "the recall had a significant impact in terms of brand reputation and Danone will be seeking a fair compensation for that," she said.

A Fonterra spokesman declined to disclose the value of the contract with Danone, citing confidentiality. Shares in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, fell 1.7 percent to NZ$5.76 at 3 p.m. in Wellington.

Shared Interests

"It’s in the interest of Fonterra to keep Danone as a client, and in the interest of Danone to get the conditions of transparency and traceability because Fonterra remains a key supplier," said Pierre Tegner, an analyst at Natixis.

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