Is Fonterra chasing Australian expansion?

New Zealand dairy giant Fonterra is eyeing New South Wales-based Bega Cheese.

Fonterra, the world's biggest dairy exporter, snagged 6 per cent of Bega in a share raid in October and has since crept up to 9 per cent of the register.

Fonterra said it moved to protect a commercial contract and wanted to be part of the consolidation in the Australian dairy industry. There was no indication of an intended takeover.

But Fairfax Media can confirm that Fonterra has been quite candid about its desire to own Bega in conversations with some buy-side investors.

In 2001, Fonterra and Bega entered a 25-year franchise licensing agreement that allows Fonterra to use the Bega brand in Australia. In 2012, Bega extended a separate 10-year cheese supply agreement with Fonterra, under which Fonterra supplies the bulk cheese and Bega returns it retail-ready. Fonterra is the largest customer through Bega's Ridge Street cut-and-wrap facility in southern NSW.

Fonterra's Australian business has struggled with the intense competition in the market and the power of the Coles-Woolworths supermarket duopoly.

Acquiring Bega would add 650 million litres to Fonterra Australia's 1.6 billion-litre milk pool and prevent another competitor from buying Bega and entering the market.

Formerly a farmer co-operative, Bega retained a shareholder cap when it listed in 2011 to allow the dairy group time to grow and ward off predators.

No party can own more than 10 per cent of Bega without approval. But the shareholder cap is due to fall away in the next few years. When Warrnambool Cheese shed its shareholder cap it didn't take long for the takeover bids to start flying.

Meanwhile Bega, which pulled out of the Warrnambool takeover race last month, is mulling its options regarding its 18.8 per cent Warrnambool stake.

Canadian dairy company, Saputo's A$9-a-share offer is set to close on Friday but it is widely expected to extend its offer. Even if Saputo surprises everyone and closes its bid, Bega may have another buyer lined up.

Chinese interests have been linked with the stake and a Chinese buyer is about to acquire United Dairy Power – Australia's largest privately owned dairy processor.

Over in Western Australia, family-owned dairy and juice group Harvey Fresh is about to fall into Italian diary and food corporation, Parmalat's, hands. Harvey accounts for one-third of WA's fresh milk market and is the state's biggest dairy exporter. The asset is expected to fetch more than $100 million.

-Australian Financial Review