Fonterra would be hard-pressed to get shareholder support for a more ambitious capital restructuring package than what was proposed, an Otago farming leader said yesterday.
Having ruled out a public float, Fonterra had few options, Otago Federated Farmers chairman Michael Lord said.
But he believed this latest package would get the support of farmers, in terms of both the new investment capital required and the 75% support of voters needed to change the constitution.
Shareholders realised the company had to grow and develop high-value products to survive, he said.
"If you stay a commodity producer, you will only get a commodity price. If you want to step up and play with the big boys, you have got to invest like the big boys."
Fonterra chairman Sir Henry van der Heyden said the three-step restructuring package would ensure the company remained 100% controlled and owned by farmers, strengthen its capital structure and take pressure off its balance sheet.
While confident it would get farmer support, Sir Henry said in an interview 75% support was a high hurdle to cross.
Sir Henry said the package was designed to encourage farmer shareholders to maintain or increase their equity in the company and to give the company the ability to invest in downstream activities such as its regional consumer and global ingredients businesses.
But as Silver Fern Farms, another co-operative seeking capital from its shareholders has found, Fonterra needed an incentive to encourage its shareholders to invest, and it was highlighting the potential riches of its consumer and ingredients businesses.
With dairy farmers able to supply milk to other dairy companies without owning shares, Fonterra was again banking on that strategy and an improved financial performance to retain shareholders, while also creating a market for its shares.
But allowing farmers to trade shares directly, rather than through Fonterra, effectively shifted the share-redemption risk from Fonterra's balance sheet to its farmer shareholders.
Farmers must own one share for every kilogram of milk solids they produce, but if the production changes, they can be redeemed or farmers can be required to buy new ones, resulting in "large amounts of money washing in and out of Fonterra's balance sheet each year as milk production fluctuates".
In the 2007-08 season, Fonterra paid out $600 million more to shareholders than it gained, but in 2008-09 it made a net gain of $260 million.
Fonterra Shareholders' Council chairman Blue Read said not only did the company have to plan for the future, but it had to tackle its exposure to redemption risk.
"We think the proposal is a good one, but no-one is arrogant enough to say they've got it 100% right," Mr Read said in an interview.
Asked if it was ambitious enough, Mr Read said the only thing missing was a public float, and shareholders had rejected that.
"It is realistic and a positive step for the co-op," he said.
All aspects of the package were up for debate, and Mr Read said it was crucial shareholders participated.
In a discussion paper released yesterday, Fonterra said allowing shareholders to own shares up to 120% of their milk production addressed fluctuating levels of production, allowed for anticipated expansion and would strengthen Fonterra's balance sheet.
Those extra, or dry shares, would not have voting rights but would receive dividends.
Fonterra said addressing the way its fair value share was valued to reflect the restricted trading market could see it drop in value by 10% to 30%.
However, it proposed a transition period, estimated at one to two years, where it was left at its current value of $4.52.
That would give time for the valuation to catch up, after which the new valuation system would apply.
It also said that trading shares among shareholders would strengthen farmer ownership and remove excessive volatility as prices would be negotiated among farmers.
A share exchange, independent of Fonterra, could be established
Restructuring proposal summary
- Shareholders to be allowed to hold shares up to 120% of their milk production, with those shares qualifying for an end-of-year dividend or profit share.
- Share valuation of change to reflect that shares can only be held by farmer-suppliers. This is likely to result in a lower value.
- Farmers to buy and sell shares among themselves rather than transacting through the co-operative.
What happens now?
- Each step needs the support of 75% of farmers to be passed.
- If feedback is positive, the first two steps could be voted on at November's annual meeting in Ashburton.
- If shareholders support those two steps, trading of shares among farmers could be discussed and voted on next year.
