In a related transaction, National Farmers' junior partner, Warrnambool Cheese and Butter Factory Company Holdings Ltd (WCB), will set up a 50/50 joint venture to run Dairy Farmers' existing cheese business.
National Foods is owned by brewing giant Kirin Holdings, and the offer, which values the NSW-based farmers cooperative on an enterprise value basis, has been endorsed unanimously by the Dairy Farmers board and will go to a shareholder vote later this year.
The offer represents a cash consideration of $5.65 per share for the cooperative's 2000 or more farmer shareholders.
National Foods has won out over other potential buyers including a consortium of Italian dairy group Parmalat and Victorian dairy cooperative Murray Goulburn.
That consortium broke up earlier this month while another potential bidder, New Zealand dairy giant Fonterra, pulled out of the race earlier this year.
Canadian dairy firm Saputo was also believed to have been interested in the Australian cooperative.
National Foods's offer includes a fully franked special dividend payable by Australian Co-operative Foods Ltd (ACF), the owner of Dairy Farmers, of up to 59 cents a share.
Dairy Farmers's chief executive Rob Gordon said the cash price was at the upper end of precedent transactions.
"In the current market climate, that was important for us," he said.
"The proposal was particularly well balanced and nicely crafted such that it recognised the need for the farmers to have an ongoing voice and the opportunity for aggregation and price negotiation."
Under the deal, suppliers to Dairy Farmers Milk Co-operative (DFMC) who sign revised contracts will receive competitive farm-gate milk prices.
The average regional price will increase between one and two cents a litre compared with those recently announced by ACF and DFMC.
The proposal is also subject to DFMC entering into revised supply contracts with new or existing suppliers until at least June 30, 2010.
Dairy Farmers produces milk products under its own name along with the Coon and Cracker Barrel brand cheeses and Ski yoghurt.
The National Foods stable includes Pura milk and Berri fruit juices along with King Island cheese, Big M milk and Yoplait yoghurts.
Along with a restructure of the business - moving out of bulk dairy products into more profitable branded products - Dairy Farmers has been preparing for a "liquidity event" since 2004.
The options included a stock market listing, a merger, or the trade sale that was announced on Monday.
Gordon said even before market conditions deteriorated, Dairy Farmers had recognised that a trade sale was "potentially able to deliver a higher-value outcome".
"We've seen market conditions deteriorate such that the attractiveness of the trade sale option has indeed been enhanced versus what might be achievable in a straight IPO (initial public offering) market currently."
Dairy Farmers achieved full year earnings before interest, tax, depreciation and amortisation (EBITDA) of $71 million before costs related to the sale.
That result represents a 25 per cent jump in earnings on the previous year despite absorbing $170 million in costs during fiscal 2008.
The National Foods proposal represents an implied multiple of 12.8 times fiscal 2008 EBITDA, which compares favourably with precedent domestic and offshore transactions in the sector, Gordon said.
National Foods managing director Ashley Waugh said his company had the capability and financial strength to leverage the acquisition of Dairy Farmers to create new business opportunities domestically and in Asia.
The joint venture between National Foods and WCB, which is Australia's only listed dairy firm, will own, licence and market Dairy Farmers's cheese products.
WCB will give the joint venture most of its bulk-cheese business, milk and management services.
National Foods will offer milk, sales and marketing services, distribution and management services.
WCB on Monday said it made a net profit of $24.51 million for the 20007/08 year, up from $9.63 million in the previous year.
National Foods has already obtained Australian Competition and Consumer Commission and Foreign Investment Review Board clearances to acquire Dairy Farmers.
As part of this process, National Foods has provided the ACCC with legally binding undertakings that will involve a limited number of divestments.
Under the terms of the deal, Dairy Farmers must deal exclusively with National Foods and pay a break fee to National Foods in certain circumstances.
A shareholder postal vote is scheduled for November.
