Fonterra Starts Capital Structure Consultation Programme

15/11/07 New Zealand headquartered dairy giant Fonterra is beginning a two-year consultation programme with its shareholders around a preferred capital structure option, which could result in the Dairy Co-operative listing its business operations in a separate company, while maintaining a controlling interest.

Fonterra’s Board of Directors outlined its preferred option for changing the Co-operative’s capital structure to its 11,000 farmer shareholders at a series of meetings throughout the country.

The preferred option involves retaining the Farmer Co-operative as 100 per cent owned and controlled by farmer shareholders.

Alongside this, a second company would be created with all the assets, liabilities and operations of the current Co-operative shifting to this entity. For at least two years both organisations would be 100 percent owned and controlled by farmers.

But ultimately shares in the second company would be listed on the NZX.

To illustrate how the structure could look after listing, under the preferred option initially farmers would own about 80 per cent of the listed entity, 65 per cent through the Co-operative and around 15 per cent through their own shareholding in the listed entity. The remaining 20 per cent would be available to the public.

Fonterra’s Chairman Henry van der Heyden said that this was a point in time when Fonterra needed to be bold and brave.

“Bold in that this is another transition for our Co-operative, brave in that it is a big step, even bigger than the three-way merger that formed Fonterra six years ago. What we are considering is a further evolution of our Co-operative to enable Fonterra to continue to adapt, to ensure it remains relevant and competitive in the changing global dairy market.

“We have bitten off these challenges before and added value to the Co-operative. We just have to do it again.”

Fonterra wants to change its capital structure to address three pressures on its current structure – redemption risk, investment choice for farmers and to provide a secure and expanding capital base to implement its growth strategy.

The preferred option was the only one of six the Board considered that would achieve all three goals.

The start of the consultation process comes two months after the Co-operative announced a record payout to suppliers of $6.40 per kilogram of milk solids.

“While $6.40 is good for farmers, it doesn’t give the Co-operative the capital to implement our strategy,” said van der Heyden.

“It may lessen the redemption risk for a while, but that is debatable because our shareholders can choose to redeem their shares regardless of the level of payout. And $6.40 does nothing to address shareholder investment choice.”

Fonterra’s farmer shareholders would be asked to vote at two stages during the consultation process, with the first vote in around May next year.

At least 75 per cent farmer approval of the option would be needed to get it to the second stage, around two years later, when another 75 per cent vote would occur.

The first vote would be to approve changing Fonterra’s structure to that of two entities and the introduction of a more transparent milk price mechanism. One hundred per cent farmer ownership would not change at this stage.

The second vote would be on whether to let Fonterra list and to introduce external capital. If the option was adopted, two shares would replace Fonterra’s current share – milk supply-backed shares in the Fonterra Farmer Co-operative and shares in the listed entity. Farmer shareholders would still get a payout comprised of a milk price plus a return on their investment in the Fonterra Farmer Co-operative. Separately, if they held on to their shares in Fonterra, they would receive a dividend on those shares.

The preferred option would retain an integrated business which the company sees as integral to implementing its growth strategy. Other options considered by Fonterra’s Board involved splitting the business or combining parts of it into a listed entity.

Fonterra chief executive Andrew Ferrier said that the global dairy market today was changing and growing quickly.

“We’re facing significant opportunities to create value and the biggest growth opportunities we are seeing are around fresh milk and behind borders.

“We are well positioned to participate in that growth and our preferred capital structure option would provide the capital to fuel our growth in the future.”

Under the proposal the two entities would be governed by separate boards, each with a majority of farmer-elected directors.

A number of special protections for farmers would be built into the listed entity’s constitution and these could only be changed through a 75 per cent farmer vote.

Key among these would be to would prevent the Co-operative’s stake in the listed entity from falling below 50.1 per cent, limit outside investors to a 10 percent shareholding in the listed entity, stipulate new milk pricing arrangements and ensure Fonterra’s headquarters and key head office functions remain in New Zealand.

Fonterra has also agreed with the Government that the Government would promote legislation to support these special protections while also ensuring that the majority of Fonterra’s shares would be held by New Zealanders and the Farmer Co-operative’s share in the listed entity could never drop below 35 per cent.

The company plans to consult extensively with its shareholders before the first vote in a series of smaller meetings.