Fonterra takes 69pc SanLu writedown

Last updated 12:04 24/09/2008
John Selkirk
RESILIENT: Despite the milk contamination scandal, China would remain core to Fonterra's growth strategy, chairman Henry van der Heyden said.

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Fonterra has taken a $139 million hit on the value of its SanLu business in China, following the contaminated milk crisis.

The cooperative says its SanLu brand has been destroyed. The writedown leaves SanLu valued at about $62 million, 69 per cent below its previous carrying value.

And Fonterra is reacting with shock to news from state media in China that SanLu Group, 43 per cent owned by Fonterra, began receiving complaints of sick children as early as last December.

Previously, Fonterra had said San Lu first started receiving complaints in March.

Chairman Henry van der Heyden expressed surprise.

"I would be absolutely disgusted and appalled if information was held back," he told a crowded news conference in Auckland.

"What has happened here is a criminal event."

Chief executive Andrew Ferrier said he had no indications that SanLu had been lying to them.

"Clearly there are very painful lessons here for Fonterra," he said.

He thought they had a reasonably good structure in China.

If one partner did not tell the truth to the other "you have a critical breakdown in that relationship".

He added later that: "Fonterra is gun shy over the whole thing."

He admitted that people deeper down in their organisation in China could have been "fooling us".

In a statement to farmer owners released ahead of the press conference, Mr van der Heyden said the scale of the tragedy has been "truly shocking".

He said China would remain core to Fonterra's growth strategy.

"As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of $139 million against the carrying value of its investment in SanLu."

This reflected the cost of product recall and the loss of value for the SanLu brand.

"Following this impairment charge, Fonterra's best estimate at this point of time, of the book value of its investment in SanLu is approximately $62 million."

Mr Ferrier said the SanLu brand cannot be saved but the company assets perhaps could.

"SanLu has been damaged very badly by this tragedy. It's hard to say at these early days how it can be re-constructed."

Mr van der Heyden rejected claims the scandal amounted to a failure of risk management in Fonterra.

"We went at length around milk quality, but if people carry out a criminal act, how can you prevent that?"

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Fonterra announced a final payout of $7.90 a kilogram of milk solids for the last season. This is the number they predicted in May.

Fonterra has lowered the payout forecast for the current season to $6.60.

Mr van der Heyden said prices have fallen away from last year's record highs.

"High prices have dampened global consumer demand and, at the same time, have encouraged production increases in exporting regions around the world," Mr van der Heyden said.

- Fairfax Media

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