The agreement becomes effective on September 1, 2008.

Under the agreement, Fonterra will also acquire the long-term rights to manufacture, market and sell Nestlé’s yoghurt and dairy dessert brands in Australia under licence, alongside its own existing brands, thereby creating a new competitive presence in the chilled dairy sector.

The SKI brand, which is currently under licence to Dairy Farmers, reverts to Nestlé in 2012, and will then be licensed to Fonterra.

For Fonterra this represents a significant step towards achieving its growth strategy in Australia, said John Doumani, managing director, Fonterra Australia New Zealand.

"We currently do not have a national presence in Australia’s yoghurt and dairy dessert sector," Mr Doumani said.

"By acquiring Nestlé’s yoghurt and dairy dessert business, it provides us with a national position and complements our existing portfolio where we hold leading national positions in cheese and spreads through our Mainland, Bega and Western Star brands.

"This agreement builds on Fonterra's long and successful global partnership with Nestlé and makes good business sense for both parties."

Mr Graham Campbell, managing director, Nestlé Australia, said his firm was committed to being a leading nutrition, health and wellness company and having a significant ongoing Nestlé brand presence in the yoghurt and dairy dessert cabinets of Australian supermarkets is a key element of this strategy.

"We have a successful track record of marketing through arrangements of this kind, both in Australia and overseas," Mr Campbell said.

"We believe that this new operation creates a soundly-based commercial entity that is well placed to be one of the leaders in the yoghurt and dairy dessert sector, and we are delighted that the vast majority of employees will be moving across to Fonterra."

In 2005 Nestlé and Fonterra completed a similar arrangement.

Nestlé moved out of the collection of milk from farmers and the manufacture of powdered milk in Australia, selling to Fonterra its Dennington factory in Victoria.

However, Nestlé continues to market milk powders, manufactured by Fonterra, to both local and export markets.

Yoghurt and dairy dessert brands marketed by Fonterra include Brownes Fresh n’ Fruity yoghurt and CalciYum dairy dessert, while Nestlé’s brands include Nestlé Diet and All Natural yoghurts, Milo Mousse, Blissful and Munch Bunch.