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Fonterra said it had sold its 50 per cent share of DFE Pharma for $633 million to a private equity company, CVC Strategic Opportunities.
"The cash from this sale, along with proceeds from our other asset sales across the year – which includes the significant contribution from Tip Top – will give us over $1 billion available for debt reduction," Fonterra said in a statement.
Chief executive Miles Hurrell said the co-op set itself a tough debt reduction target but was pleased with the progress being made.
"It's an important milestone in our Co-op's plan to lift our business performance," Hurrell said.
Fonterra said in March that it was reviewing its share of DFE Pharma, a 50 per cent joint venture with Royal Friesland Campina of the Netherlands.
DFE Pharma was identified for sale due to the substantial capital required for its future growth, it said.
CVC Capital Partners is a leading private equity and investment advisory firm, managing US$83 billion of assets in 73 companies worldwide.
The $633m sale to CVC Strategic Opportunities II is made up of a cash payment of $537m, payable on completion of the sale, plus an interest-accruing vendor loan of $96m, for a term of up to 15 years. Built into the deal is a potential additional payment of up to $44m based on DFE's performance over two years.
The sale is subject to receipt of regulatory approvals from competition authorities.
Hurrell said that Fonterra was pleased to have secured a good sale price and will stay committed to the ongoing success of the DFE Pharma business through a long-term supply agreement and the interest-accruing vendor loan.
Hurrell said a big part of the success of DFE Pharma had been the high-quality lactose produced by the team at Fonterra's Kapuni site in Taranaki.
Fonterra will continue to supply lactose to DFE.
"This milestone, along with the significant inroads made in our capital and operational expenditure during FY19, makes for a good initial chapter in our business turn-around," Hurrell said.
"It puts us on the right footing to deliver our new strategy and a sustainable lift in our performance," he said.
Fonterra is due to report its annual result on Thursday, having already postponed its release from earlier this month.
The co-op has confirmed prior guidance that it expects to report a loss of $590-675 million for the year to July 31, which is a 37-42 cent loss per share.
Fonterra's units, which given investors access to its dividends, last traded on the NZX at $3.21. The units have dropped by 34.7 per cent over the last 12 months.