Fonterra has ruled out publicly listing shares on the NZX. Agribusiness Editor Neal Wallace looks at what options New Zealand's largest company has to raise funds.
Fonterra may split its shares into wet and dry classes and sell non-core consumer branded assets as part of its capital restructuring.
Further speculation suggests the co-operative could impose a two or three-year moratorium on farmers cashing in shares to take pressure off its balance sheet.
Next Friday, Fonterra will announce details of a three-step process to restructure its capital base and there is some speculation it may follow other co-operatives, LIC, Satara and Eastpack, and split its shares into two classes.
The ruling out of a public listing last week has left Fonterra with few options to raise the extra capital it needs and reduce the share redemption risk, other than turning to shareholders, many of whom have cash-flow problems from a low payout.
A change in strategy from a global roll out of its brands to concentrate on ingredient and food services, left it open to sell non-core consumer businesses such as Chile's Soprole.
Fonterra has run down its equity and increased debt because it has functioned as a pass-through business - returning most or all of its profit to shareholders through the milk price.
Only once since 2001 has the co-operative retained earnings and the result has been soaring debt, with its debt to equity ratio nudging 60%.
It was expected to improve to close to 50% by the end of this financial year.
Sources say splitting shares into A and B, or wet and dry classes, would solve the twin problems of a high cost of entry and a lack of new capital.
Wet shares would have a face value that gave its holder access to a processing plant - the stainless steel for which they would be paid a basic milk price.
Dry shares would have a higher face value and earn dividends from Fonterra's added-value activities.
Fonterra's shares were independently valued each year.
They were currently $4.52, with shareholders requiring one share for every kilogram of milk solids produced.
The share price has reached $6.56 and proven an obstacle for new entrants, while pure economics was encouraging some established farmers to cash in, retire debt and supply milk to other companies under contract.
Splitting the shares could also provide a financial stepping stone for new suppliers.
After the drought of 2007-08, Fonterra paid out $600 million in capital to farmers who had more shares than the milk they produced.
A moratorium on redeeming shares would give Fonterra some breathing space and allow it to protect its capital base.
Delaying the payout of redeemed shares was common with other co-operatives, which require a board decision, a process which can take several years.
Fonterra's change in strategy could allow it to sell off some of its non-core consumer businesses, such as Soprole in Chile or Tip Top ice cream in New Zealand.
Fonterra has previously sold assets in Australia and India, but it bought Soprole outright last year from the Roman Catholic Church, paying $300 million for the 42% it did not own.
Soprole's products had strong public recognition and a favourable purchase price meant, potentially, a healthy margin on any sale.
It has been a profitable investment, returning on average $25 million a year, but its value could be greater in the capital a sale would release.
Sources doubt Fonterra would sell its Anchor, Anlene, Anmum or Mainland brands, which were core dairy assets and well established in New Zealand, Australia and Asia.
Tip Top ice cream was not considered a crucial investment but one where competition meant slim margins.
Dairy-based infant nutrition formula was a sector that was growing rapidly and one in which Fonterra said it wanted to be involved.
Anlene and Anmum were two of Fonterra's key brands in that sector and were established in Asia, the region considered to have the greatest potential for dairy growth.
Restructuring options
> Splitting shares into wet and dry: Wet shares give factory access for milk and dry shares earn a dividend on the company's value-added activities.
> A possible sale of a consumer business - Soprole?.
> A moratorium on farmers cashing in their shares.
