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
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
"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
"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
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
"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