FrieslandCampina and Milcobel a dream marriage?

So there is a lot of faith in the new combination of cooperatives. But merging two combinations is not an automatic success story. Friesland Foods and Campina did an exemplary job in the first years of their existence, but then things went downhill. DMK, the merger of Nordmilch and Humana, on the other hand, has always had trouble becoming more than the sum of its parts. There are more examples like this.

Love at first sight?
The announced merger is not love at first sight either. FrieslandCampina and Milcobel first looked elsewhere, although they no longer talk about it. Nevertheless, they did end up together in the end, and that could still result in something beautiful. 

There are also urgent reasons to make something of it together. It may not be a 'shotgun wedding', but FrieslandCampina must not fall below a critical size of 9 billion kilos of milk in terms of milk pool, otherwise the company will lose many of the economies of scale and other associated advantages that it currently has. For example, with regard to financing. With Milcobel it has an additional buffer of 900 million kilos on top of the roughly 9 billion. That buffer seems sufficient, but is badly needed, because the shrinkage of the dairy farming sector is not over yet. Just look at the expected consequences of the new nitrogen rulings of the Council of State this week (Amercentrale and Rendac).

Even more difficult boat
Milcobel is in the same boat as far as critical mass is concerned, and perhaps even more difficult. In recent years, it has steadily lost dairy farmers, particularly larger ones. In the meantime, the group had not been operating optimally for some time and was constantly reorganising. Last year, it struggled with the consequences of a listeria infection, a faltering distribution centre and last spring announced further reorganisations to reduce costs, including the closure of powder towers. That things were going badly was also evident from the forced departure of CEO Nils van Dam.

Ysco to private equity
Due to the ongoing financial pressure, the goose that laid the golden eggs was also put to the poulterer: Ysco was sold to private equity. The proceeds are partly for debt reduction. Loyal members have also been promised an extra reward from the proceeds. However, the additional payment for this year remains limited to 50 cents per 100 litres of milk.

Then FrieslandCampina will do better. In August, almost 70 cents had already been reserved. FrieslandCampina is also still reorganizing and also announced the closure of two factories, but otherwise seems to have things reasonably in order for the time being. The members of Milcobel probably want to merge with such a company.

Closed exchanges
It remains to be seen whether this will work with a closed purse. There is a difference in cooperative contribution. Anyone who wants to become a member of FrieslandCampina must bring €5,00 per 100 kilos of milk and buy membership certificates for €8,00 per 100 kilos. This is possible with deferred payment, the €5,00 from 1-7-2026. At Milcobel, the contribution of capital is capped at €7,50 per 100 liters of milk, but the 'loyal members' have been promised 2 times €1,50 per 100 liters of milk from the sale of Ysco. Furthermore, there is the aforementioned additional payment for 2024 of €0,50 per 100 kilos plus next year a merger bonus equal to the volume surcharge.
Perhaps some equity will have to be settled after that. Milcobel's weak equity was initially an obstacle to a merger, it is reported.

Arla in between
A small scratch on the merger is the long-term agreement on whey processing that Milcobel concluded with Arla in December 2022. Cheese whey is currently very popular for the production of high-quality whey powders, such as WPC80. Milcobel did not have its own installations for this, but decided to add value to its own whey together with Arla. In itself a fine initiative, which could yield the members up to €1,00 per 100 liters of milk, but for that the new ultrafiltration in Kallo at €18 million must first be earned back. And FrieslandCampina would certainly have wanted the Milcobel whey too.

Other Champions
Ultimately, these are all surmountable hurdles, but the merger with Milcobel can hardly be a 'free' merger for FrieslandCampina. Costs have to be made to ensure that the two companies work together optimally, and these costs will almost certainly weigh more on FrieslandCampina than on Milcobel. The former is simply bigger and richer. That will almost certainly not be said that way.

The Belgian dairy industry must swallow the loss of a national champion and get used to a new national champion: the Walloon Laiterie des Ardennes. Together with Inex, these will soon be the only dairy companies that will truly remain in Belgian hands. They are good for about 1,6 billion of the 4,2 billion liters of Belgian milk. The rest is in Dutch, French or Scandinavian hands.