* Fonterra says to "vigorously" contest suit
* Lawsuit comes as Fonterra cuts earnings, dividend forecast
* Danone to stop buying Fonterra products
* Fonterra units down 1.7 pct; Danone shares down nearly 1
By Naomi Tajitsu and Geert De Clercq
WELLINGTON/PARIS, Jan 9 French food group Danone
said it would sue wholesale dairy exporter Fonterra
and stop buying products from the New Zealand firm
following a contamination scare that sparked the recall of
infant milk formula across Asia.
The world's largest yoghurt maker did not say how much money
it was seeking, but it has previously said it wanted full
compensation for what it says were 350 million euros ($476
million) in lost sales following the recall of the company's
Dumex and Karicare infant formula products.
Danone buys a range of dairy ingredients from Fonterra, but
is one of its biggest customers for milk powder, according to
analysts who cover the sector. Fonterra, which said it would
contest the suit "vigorously", declined to give details on its
sales to the French firm.
Danone has said that Fonterra supplied about 16 percent of
the milk ingredients for its baby food business, which accounts
for 20 percent of its total revenue.
In August, Fonterra said it had found a potentially fatal
ingredient in a range of products sold by multinational
companies. After recalls were issued across nine countries
including China, the scare turned out to be a false alarm
because the ingredient was found to contain a less harmful
In a statement, Danone said it was starting proceedings in
the New Zealand High Court against the world's largest dairy
processor, as well as arbitration proceedings in Singapore to
bring all facts to light and obtain compensation.
The company said it was also terminating its supply contract
with Fonterra and would make any further collaboration
contingent on a commitment by Fonterra to full transparency and
compliance with Danone's food safety procedures.
"This affair illustrates serious failings on Fonterra's part
in applying the quality standards required in the food
industry," Danone said.
Danone told Reuters it would source products from other
firms, without elaborating.
Other potential suppliers could include Glanbia,
which is building a new milk powder plant in Ireland, and Arla
Foods, which recently told Reuters it has "massively
benefited" from a desire by milk powder buyers to diversify
supply after the food safety scare and a drought last year
highlighted the risk of over-reliance on one supplier.
Some dairy brands in China, for example, have started to
look to diversify.
Glanbia and Fonterra's much smaller competitors in New
Zealand would not comment on whether they had seen more business
from Danone as a result of the dispute. Arla was not immediately
Danone's decision to halt purchases may be an effort to
distance itself from the source of the perceived problem.
"It's all about trying to rebuild their brand," said an
analyst, who added that Danone was unlikely to face any supply
interruption. "This isn't a panic decision today. They've been
looking at (diversifying) since the minute it happened."
Danone has a cushion, the analyst said, since the sudden,
sharp drop in consumer demand means there is a large amount of
product that still needs to be sold.
Fonterra, a farmer-owned co-operative, has denied any legal
liability to Danone regarding the recall.
"Fonterra has been in ongoing commercial discussions with
Danone and is disappointed that they have resulted in legal
action," the company said in a statement.
Shares in Fonterra's trading fund closed down 1.7
percent, while Danone shares were down 0.7 percent at 1245 GMT.
SETTLED WITH SEVERAL CUSTOMERS
The two sides started negotiations in October, after Danone
recalled its Dumex formula products in China, where demand for
foreign branded infant formula is high due to a series of
domestic food quality issues. It is a key growth market at a
time of sluggish demand in Europe.
Eight companies issued product recalls in August. Danone is
the first to take legal action against Fonterra. In December,
Fonterra said it had reached agreements to compensate six firms
and that it was "very, very close" to an agreement with an
affected nutritional company.
New Zealand's largest company controls roughly one-third of
global dairy exports and is a major wholesale supplier of milk
powder used in milk formula and other food products marketed by
Danone, Nestle and other multinationals.
A big court settlement in Danone's favour would hurt
Fonterra's bottom line given that it has already slashed its
earnings and dividend forecast on the back of rising production
costs at a time when it is struggling to keep up with soaring
demand for milk powder.
"A large fine of the magnitude that Danone ... has stated
would have a material impact. You'd have to either remove your
dividend or address your capital structure," said Rickey Ward,
head of equities at Tyndall Investment Management in Auckland.
Ward said that given strong global demand for dairy
products, particularly from China, Fonterra was unlikely to have
problems finding new buyers to replace cancelled orders.
"It's not nice to lose a big customer ... (But) there's
large global demand and short supply so Fonterra may be able to
fill that void if there is a big void," he said.