Danone Cancels Contract With Fonterra Over Botulism Scare

January 9, 2014 04:41 AM

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.

Auckland-based Fonterra lowered its dividend forecast on Dec. 11 to 10 New Zealand cents per share from 32 cents and predicted adjusted full-year earnings would decline as high milk prices erode returns on products such as cheese and casein. At the same time, it said it can’t keep up with surging demand for milk powder from China and other emerging economies.

Fonterra’s dispute with Danone "is a concern because it will probably affect the payout," said Willy Leferink, chairman of the dairy division of Federated Farmers, who predicted it will end with an out-of-court settlement. "All the industries will be damaged if we’re going to relive all the issues around botulism. I hope an amicable agreement will be reached."

‘Very Minimal’

Fonterra said Sept. 25 it had booked only a NZ$14 million ($12 million) provision for fallout from the contamination incident. The company has taken a range of measures to improve food safety and quality assurance in the wake of the scare, which raised concerns over New Zealand’s international reputation and export earnings.

Still, Chief Executive Officer Theo Spierings said last month the company’s legal liability to Danone was "very, very minimal, if not zero."

"Fonterra has been in ongoing commercial discussions with Danone and is disappointed that they have resulted in legal action," the company said in a statement today. "Fonterra will now work through the detail of Danone’s claims. It continues to be confident in its position and will vigorously defend any proceedings."

A copy of the lawsuit wasn’t immediately available from the New Zealand court.

Newton said that beyond compensation, Danone is making any further collaboration with Fonterra contingent on a guarantee that a similar situation "will never occur again."

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