Three step process for Fonterra’s restructuring

Fonterra has announced a three step capital restructuring process:

 1. Strengthening the Share Structure. Farmers would be allowed to hold shares up to 120% of their milk production (for most farmers, the current limit is closer to 100%) and there would be enhanced incentives for them to hold shares even if their production falls. The rules about the pricing of end of season share transactions would also be tidied up.

 2. Restricted Share Value. The way Fonterra shares are valued would be adjusted to reflect that share ownership is restricted to farmers only. As this would likely result in a lower share value, there would be a transition process to deal with any impact on the share price.

 3. Trading Among Farmers. Fonterra would move to a system where farmers buy and sell shares among themselves, rather then transacting through the Co-operative.

Opposition from farmers to a public listing has restricted options for the company. This plan retains farmer control but also depends on farmer funding at a time when dairy farm debt is high and the payout lower than it’s been in the last two seasons.

Fonterra Chairman Sir Henry van der Heyden said :

“The options we are discussing with farmers would strengthen the capital structure and make Fonterra more adaptable and competitive in the international marketplace. They seek to encourage farmers to maintain or increase their equity in the Co-operative.”

. . . He said the key to improving Fonterra’s capital structure was reducing and eventually eliminating redemption risk. Redemption risk occurs because Fonterra’s share levels are related to milk production and the Co-operative is responsible for buying shares back off farmers when they want to redeem them. After milk production fell during the 2007/08 drought, for example, Fonterra had to pay out $742 million of equity to farmers via redemptions.

“To be successful and achieve the best possible payout for farmers, Fonterra can’t afford to have hundreds of millions of dollars washing in and out of the balance sheet every time milk production fluctuates, for whatever reason,” Sir Henry commented.

“We need certainty in our equity base to invest in dairy processing operations so as to drive a higher payout. These investments require capital and are long-term commitments – the stainless steel of a new processing plant, for instance, has a useful life of more than 30 years.”

Sir Henry said the success of the suggested capital structure changes would ultimately depend on how much additional capital farmer shareholders were prepared to commit to their Co-operative. It was difficult to estimate how much new equity might be raised from farmers, but the Board believed it should be enough to fund Fonterra’s needs for about the next five years.

 Shareholders will be consulted on the options which will be put to a vote. They will require 75% support before the co-operative can proceed with the changes.

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