Fonterra to fight action by French food giant

Fonterra will "vigorously defend"court action French food giant Danone is bringing against it in the wake of the botulism scare and says it is confident of its position.

Danone announced today it launched legal proceedings against Fonterra and has ended its supply contract with firm.

The Paris-based company is initiating proceedings in the High Court at Auckland and arbitration proceedings in Singapore "to bring all facts to light and to obtain compensation for the harm it has suffered," over the dairy giant's whey protein concentrate recall.

Danone - which is the parent company of infant formula manufacturer Nutricia - put the cost of last year's recall at 350 million euros ($575 million) when it announced its third-quarter results, while Fonterra recognised a contingent liability of just $14 million in its own accounts.

Danone wants compensation from Fonterra for both the losses it suffered as a result of last year's botulism scare and the harm caused to the French food giant's reputation.

Asked the amount of compensation the French firm is seeking, a spokeswoman said the affair had caused "serious damage to the Danone business".

"Danone anticipates a free-cash-flow loss of 300 million euros for the fiscal year 2013. Secondly, the recall had a significant impact in terms of brand reputation and Danone will be seeking a fair compensation for that. The total damages will be quantified at the time of the trial," the spokeswoman said.

Fonterra, in a statement today, said it was "disappointed"with the action.

Fonterra had been in ongoing commercial discussions with Danone and was disappointed that they have resulted in legal action.

"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. Fonterra stands by its track record of having world-class food safety and quality standards, quality systems, and robust testing regimes across all its manufacturing facilities," the company said.

Danone also said this morning it would terminate existing supply contract with Fonterra and make "any further collaboration contingent on a commitment by its supplier to full transparency and compliance with the cutting-edge food safety procedures applied to all products supplied," it said.

"As a leading food company, Danone makes food safety an absolute priority and is committed to working only with suppliers that share and respect the same demanding professional standards," it said.

Director of equity research at Woodward Partners David Stanley said while Danone was "very important customer"for Fonterra, it represented only a small percentage of its revenues.

"I'm not sure the value of the supply contact but it would be fair to say in the context of [Fonterra's] total sales it's relatively small," Stanley said.

"We're talking a few per cent at most of Fonterra's revenues ... Danone is obviously a very large and important customer but it's not like we're talking 10 or 20 per cent of sales"he said.

Fonterra wrongly suspected in August last year that 38 tonnes of whey protein - used to make a range of products including infant formula manufactured by Nutricia - had been contaminated with a botulism-causing bacterium.

The whey protein was ultimately cleared as a false alarm but not before a recall of baby formula products amid fears that children could be harmed.

Nutricia, which is the Australasian subsidiary of Danone, was hit hard by the contamination debacle.

It was forced to recall 67,000 cans of its Karicare baby milk brand in New Zealand.

Of the eight customers affected by Fonterra's recall, the company agreed to a commercial outcome with all of them except Danone, including extending supply contracts for the next 10 years and agreeing to volume increases.

In December, Fonterra chief executive Theo Spierings said months of talks with Danone over losses from the recall had failed to reach a commercial solution but he expected any court action would show the New Zealand company has no liability in its contract.

Stanley said: "So it [Danone] suffered a significant loss ... and it feels that it was Fonterra's actions that contributed to this and Fonterra should therefore be contributing more to recognise that in terms of recompense than Fonterra is strictly obliged to legally and in order to do that it's maximising leverage to emphasise its position by this action."

"There would be many more millions of dollars involved from a point of view of the value of the supply contact than perhaps [Fonterra's] strict legal liability and in that sense Danone is acting to get Fonterra to be more forthcoming ... at the end of the day, this is going to be very much a question of how much it values its relationship with Danone," he said.

NZX-listed units in the Fonterra Shareholders' Fund were trading at $5.74 shortly before midday, down 2.05 per cent.

- Additional reporting BusinessDesk

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