Friesland Foods and Campina revealed today that exploratory talks are underway to merge into a global dairy giant - and Campina CEO Justin Sanders is standing down "to give the talks more chance for success".
Between them, Friesland Foods and Campina have a combined turnover of around €8.3 bn euros, and employ 22,000 people. They are associated with 17,000 dairy farms in The Netherlands, Germany and Belgium, which supplied a total of 8.7 bn kg of milk in 2006.
The companies have said a merger would significantly strengthen their positions in in both consumer products in Europe, Asia and Africa, and in ingredients on a worldwide basis.
The dairy market is presently facing a number of issues that are affecting market conditions. These include re-regulation markets by the EU and the World Trade Organisation, and a global market for dairy products that can fluctuate wildly.
The companies say that competition has been hotting-up in the dairy market, both on the regional and the global scene. Moreover, demand for dairy products is increasing in emerging markets, such as India and China, which is having an affect on global consumption volumes.
Although it looks likely to be many months before any deal is signed and sealed, Campina announced today that its CEO Justinus Sanders is to stand down in order to "give the merger the best chances of success".
"The merger will mark the start of a new era for the company, and it was therefore decided by those concerned that it would be wiser if Mr Sanders, who has set his stamp on Campina for the past 15 years, did not move to the new concern," said the company.
Friesland and Campina are not the only players on the global dairy market mulling ways they can take advantage of opportunities and respond to challenges.
Last month Fonterra announced a two-year consultation process over potentially splitting its operations in two and floating on the New Zealand stock exchange.
Fonterra cited much the same reasons as Friesland and Campina for the proposed change.
The matter on the table is the creation of a new company which would be called Friesland Campina, which would be owned by the dairy farmers that currently own the two co-operatives.
The single company would, the companies believe, be able to have a sharper focus on strategies such as growth in brands and value-added concepts, stepping up production, development, marketing and processing, brand positioning in emerging markets, and a "strengthening" of activities in the ingredients area.
At present, the purpose of the talks is to determine whether the proposed new multinational would actually generate added value for its member farmers through milk price and other factors.
The participants are also investigating whether milk volume growth would be in line with anticipated growth of the new company.
The first stage in the talks is the creation of a new cooperative, called Zuivelcooperatie Friesland Campina. If the merger goes ahead, all members of Friesland and Campina would participate as equals, with rights, obligations and voting rights determined by the amount of milk they supply.
Further down the line, the talks will consider membership regulations, member financing and how milk prices should be determined.
The present goal is to be in a position to present a merger agreement to the General Assembly of Friesland Foods and the Members Council of Campina for approval by the middle of next year.
"If things go as expected, the merger is likely to be completed in the second half of 2008," said the companies.
As for Fonterra, its consultation is based around adoption of a preferred capital structure that could see it split in two and becoming a public company.
The board of directors said it had been weighing up six options for changing its capital structure with a view to ensuring it stays relevant, competitive and adaptable in the changing dairy market.
The capital structure plan would see the dairy co-operative listing its business operations in a separate company, while maintaining a controlling interest.
The farmer cooperative would remain 100 per cent owned and controlled by farmer shareholders, but all the assets, liabilities and operations of the cooperation would shift over to a second company.
The plan is for this second company to be farmer-owned for two years, but ultimately for shares in this to be listed on the New Zealand stock exchange. The farmers would own about 80 per cent of the listed entity - 65 per cent through the cooperative and 15 per cent through their shareholding.
The remaining 20 per cent would be up for sale to the public.
The other five options mulled by the board involved splitting the business in other ways, or combining parts into a listed entity. But the preferred plan was said to be the only one that addresses three pressure points in its current structure: redemption risk, investment choice for the farmers and the need to stay competitive in the changing market climate.