"This is our preferred option to achieve our objective for entering the national chilled milk and yoghurts markets in Australia," said Fonterra chairman Henry van der Heyden.
"These are attractive growth categories, with good growth prospects and solid export potential to Asia. The business complements our existing strengths in cheese and spreads in Australia."
The dairy industry is one of the fastest developing industries in China. Milk consumption is relatively low at present at around 8 litres per person, compared to 30 litres elsewhere in Asia, but consumption is expected to grow rapidly.
Last year, production value reached 50.9 billion yuan (US$6.15 billion), up 35 per cent year-on-year. A number of major processors have emerged as industrial giants in China.
Fonterra is now looking to get in on the action. The group recently forged a joint venture with the San Lu dairy company, a major player in the market.
"One of the drivers here is Government policies to encourage milk consumption and not only because of the health benefits,"
said Fonterra chief executive Andrew Ferrier.
"Their view is that higher demand for milk will transfer wealth to local dairy farmers. Higher demand is being actively promoted through programmes such as agricultural subsidies, milk in schools and the setting of per capita consumption targets rising from 18kg in 2010, to 41kg in 2030."
The group values National Foods at A$1.62 billion (€953m), and says that the deal is subject to a minimum acceptance provision of acquiring more than 50 per cent of the company's shares. Fonterra is currently National Foods' largest shareholder with a 17.2 per cent stake in the company and has an agreement to acquire an additional 1.3 per cent, conditional on FIRB approval.
The Fonterra offer is conditional on the group acquiring a holding of more than 50 per cent of National Foods shares, and National Foods not announcing or proceeding with any merger or similar arrangement with rival SPC Ardmona.
With regard to the regulatory approvals, Fonterra believes that the only likely competition issue in Australia is in relation to market milk in Western Australia. But it is Fonterra's view that this would be resolved through the divestiture of market milk assets of the merged group in Western Australia.
"We have had a preliminary discussion with the ACCC on the matter," said Ferrier. "We will continue to work with them constructively as they conduct market inquiries and we work together on the divestiture in Western Australia."
In New Zealand, Fonterra believes that any issues arising from the acquisition of National Foods' yoghurt and dairy dessert operations can be satisfactorily resolved but Fonterra will be working with the New Zealand Commerce Commission regarding these matters.
"Our entry into the national milk market and yoghurt in Australia from our leadership position of cheese and spread products will build a strong Australian base for growing significant export revenues to Asia, which is Australasia's closest large market," said Ferrier.
"We see this as a logical and sound business direction considering Fonterra is already one of the largest Australian dairy exporters."
Fonterra is one of the largest dairy companies in the world and it is the world's biggest dairy exporter. It is also a world leader in large-scale milk procurement, processing and management.
In Australia alone, Fonterra employs more than 2,000 people and generates more than A$1.4 billion per annum in turnover. Its brands account for 14 per cent of dairy sales in Australia.