Having gained EU approval to merge, the Netherlands-based dairy groups Campina and Friesland will hope that their combined strength will better prepare the business to withstand the tough economic times facing the European dairy industry and the liberalisation of the sector. With the deal rubber stamped, FrieslandCampina is now likely to turn its attention to exploiting the opportunity presented by the emerging markets of eastern Europe and Asia. Dean Best reports.

After a year of waiting, the big cheeses at Dutch dairy group Friesland Foods and Campina yesterday (17 December) sounded like the cats who had got the cream.

Almost exactly 12 months to the day since the two sides first revealed they were in talks to merge, the EU finally gave its approval to the creation of a EUR9.1bn (US$13.14bn) dairy giant.

FrieslandCampina will become one of the world's largest dairy processors, employing 22,000 people in around 100 production and sales locations in 24 markets around the world.

The size and scale of the combined business and its potential impact on competition in certain markets meant the EU was sure to take a long, hard look at the deal but, after months of scrutiny, it gave it the green light. A few hours later, the merger was rubber-stamped by farmer-members of both co-operatives - much to the delight of executives on both sides.

Campina chairman Kees Wantenaar, who is set to become chairman of FrieslandCampina, said economic conditions and the liberalisation of the dairy sector make a merger more necessary than it did a year ago, when the two sides first agreed to join together.

"When the merger was announced a year ago, we were going through times of unprecedented high prices in the dairy sector. The situation on the global dairy market has changed drastically since then. When we started with the merger in 2007, there was no sign of a financial crisis, let alone a recession," Wantenaar said.

"The new company will start in a challenging market and will have to prove itself in these testing conditions. FrieslandCampina has scale in research, production and marketing, local market knowledge, entrepreneurship and highly skilled and motivated staff. The past period has demonstrated this. Teams have worked very hard and very well together to prepare the merger. People have literally been working day and night. It was a really inspiring experience."

Cees 't Hart, who becomes FrieslandCampina's CEO after a spell in charge at Friesland, hailed the  "combined innovative strength" of the two companies. "We expect to be able to grow more strongly in brands and new concepts," 't Hart said. "This not only applies to consumer products, but also to dairy ingredients."

Consolidation in the dairy sector has long been predicted by industry watchers, particularly against a backdrop of volatile dairy commodity prices. However, Mark Voorbergen, dairy specialist at researchers Rabobank, believes the motives behind the creation of FrieslandCampina is less about cost and more about scale.

"Both of those companies, in terms of production efficiencies, were pretty lean and mean already," Voorbergen tells just-food. "The long-term revenue potential is the driver of this merger."

The emerging markets of the East - the recent melamine scandal in China notwithstanding - represent a potential goldmine for the world's largest dairy groups. Friesland, for example, already sells into markets in the Middle East, west Africa and south-east Asia, but Voorbergen asserts that the enlarged group will have the strength to further invest in dairy's more buoyant territories.

"[Those markets] create a very nice bonus to the money you are making in Europe [but] you need a lot of capital to do it right," Voorbergen says. "So far, they have been doing it by themselves but they have taken a  big step over there just by combining their R&D, their marketing budget."

Emerging markets will prove key to any future growth for the multinational dairy processors and will also help dairy prices recover after falling prices this year. Following last year's record dairy prices, a combination of increased supply and lower consumer demand has hit prices in 2008. According to a report last month from Rabobank, prices are expect to bounce back some time in 2009 as global demand recovers and dairy consumption in the world's emerging markets continues to grow.

Voorbergen says that falling demand, linked to the global economic downturn, has depressed dairy prices, and once the economy improves, so should prices. In the world's emerging markets, he says, demand for dairy will continue to run in tandem with the development of local economies. "Population growth, urbanisation - which gives people exposure to modern retail outlets - there are some very strong, basic drivers of dairy demand," Voorbergen explains.

Of course, the new FrieslandCampina will face stiff competition in trying to tap into the buoyant dairy consumption of the East. Arla Foods, the Denmark-based dairy giant, already has extensive operations in markets like China and, after a recent internal review, signalled that it wanted to beef up its presence and increase its exposure to those kind of markets, particularly Russia and China.

Arla, meanwhile, is also sure to play a central role in any further consolidation of the dairy sector. CEO Peder Tuborgh revealed to just-food last month that the company would look to play "an active role" in any consolidation and he pinpointed northern Europe as a region where more tie-ups were likely to happen.

"We foresee a significant increase in milk production across this northern European region, and our response to this must be to take part in that actively through consolidation," Tuborgh said. "Growth is essential to success on the international dairy market today, and Arla simply cannot sit back and watch passively as new opportunities present themselves."

The creation of FrieslandCampina, it seems, could herald the latest shake-up of the dairy sector.