Fonterra Begins Consultation on Step 3 of Capital Structure Changes

Fonterra Chairman Sir Henry van der Heyden said all three steps were developed to ensure Fonterra remained 100% controlled and owned by farmer shareholders and that the Co-operative remained focused on paying the maximum sustainable Milk Price.

7 Apr 2010 --- Fonterra Co-operative Group Limited said possible changes to its capital structure would mean more flexibility for farmers to buy and sell Fonterra shares to match their cash flows, while providing Fonterra with permanent share capital to grow shareholder returns.

If they choose, farmer shareholders would be able to buy and sell shares among themselves at a market price throughout the year on any business day, using an online system or by calling an 0800 telephone number. Or if they choose, they could leave it to the Co-operative to buy and sell shares on their behalf at the end of the season.

This differs from the current approach where farmers are issued or redeem shares, usually once a year, through the Co-operative at a price set by the Board. There would also be greater flexibility in the rules about how many shares farmers could own in relation to their milk production.

Trading Among Farmers is the third step of a three-step process to protect and strengthen the Co-operative. The first two steps were approved by farmer shareholders last year and included the provision for farmer shareholders to own additional “dry shares” beyond their current or expected milk production levels.

Fonterra Chairman Sir Henry van der Heyden said all three steps were developed to ensure Fonterra remained 100% controlled and owned by farmer shareholders and that the Co-operative remained focused on paying the maximum sustainable Milk Price.

The Fonterra Shareholders’ Council supports the concept of Trading Among Farmers and has approved taking the suggested approach to farmer shareholders for consultation.

Under Step 3, a new Fonterra Shareholders Market would allow farmer shareholders to buy and sell shares among other Fonterra farmers on any business day, when it suits their cash flows. This would stop redemption risk − money washing in and out of the Co-operative as farmer shareholders purchase or redeem Fonterra shares through the Co-operative at the end of the season.

Sir Henry said Trading Among Farmers would not only strengthen Fonterra’s balance sheet, it would also provide more flexibility for farmer shareholders to run their businesses: “Farmers would be able to buy and sell shares through the year, meaning we could share up to match production and manage our cash flows better.”

Sir Henry said it was the right time to consult with farmer shareholders on possible further changes to the Co-operative’s capital structure: “We have managed redemption risk reasonably well so far but it may not work as well in the future.

“For example, there is the risk of strongly capitalised or subsidised offshore investors entering New Zealand and paying unsustainably high prices for milk to get a foothold. In such an event, Fonterra could face considerable redemptions − putting our balance sheet under potentially significant financial stress.

“And, the reality is that the current system penalises loyal shareholders who effectively fund the return of share capital to farmers leaving the Co-operative,” said Sir Henry.

Trading Among Farmers was unveiled to Fonterra’s 10,500 farmer shareholders in a special television broadcast and will be discussed at a series of farmer meetings around the country next week, 12-16 April. Feedback from this consultation process will be taken into account before any final proposal is put before farmer shareholders for a vote. Any proposal would require 75 per cent support of farmer shareholders voting.

The proposed details for Trading Among Farmers include:

- Giving famer shareholders the choice to invest in extra dry shares up to a maximum of 2 times their annual production (2 shares per kgMS from the current 1.2 shares per kgMS.) The Board would target an overall cap on dry shares at 20 per cent of the total number of shares on issue, with provision to extend the cap by 5 per cent in extreme circumstances.
- New and current farmers would be able to share up over three years to cover additional production, while exiting and current farmers would have up to three years to sell their Fonterra shares.
- Farmers would receive a higher price for share-backed milk compared with unshared milk to encourage them to back their production with shares as quickly as possible. Only shares backed by milksolids would have voting rights.
- Farmer shareholders could choose to buy or sell shares among themselves via the Fonterra Shareholders Market. Those farmer shareholders who did not want to go through the process of buying and selling shares would not have to do anything; Fonterra would buy and sell shares for them via the market, at the current market price, to match their production following each season.
- A range of mechanisms would be put in place to ensure there was a sufficient volume of shares to buy and sell. One or two substantial financial institutions would be appointed to provide plenty of volume in the market and less fluctuation in price. These “Registered Volume Providers” would buy and sell shares in a similar way that banks buy and sell foreign exchange, with Fonterra setting their charges.
- A registered exchange would be contracted to provide the administrative platform behind Fonterra’s farmer-only market.
- A new Fonterra Shareholders Fund would help farmers purchase new shares or retain shares they would otherwise have to sell.
- The fund would pay farmer shareholders for the right to receive dividends and the gain/loss from any change in value of those shares. This would enable farmer shareholders to free up cash.
- However, farmers would still be paid their full share-backed Milk Price, remain the owner of their shares and retain all their voting rights based on share-backed milksolids.
- Farmers could buy back their entitlement to dividends and any change in the share price when they wanted to at the prevailing market price.
- The Fund would raise the money it needed to pay farmers by selling investment units.
- It would target friendly investors such as sharemilkers and retired farmers. Institutions and the public would also be able to participate. Unitholders and the Fund would not have any voting rights in the Co-operative.

Sir Henry said Trading Among Farmers was an opportunity to help secure Fonterra’s leadership in both New Zealand and the global marketplace, by being a financially strong and reliable partner to the world’s largest food companies, and having the financial capacity to continue to strengthen our regional consumer products businesses. It would make the Co-operative better placed to grow returns – “not just for today’s farmer shareholders, but for generations to come.”

“I urge all farmer shareholders to get involved in the consultation process and have their say about the future of our Co-operative,” Sir Henry said.