Higher debt = less control

Fonterra shareholders weren’t keen on a public float of the cooperative because they didn’t want to lose control.

But if a business has a lot of debt, as Fonterra does,  it’s the banks not the shareholders who are in control.

Brian Gaynor says:

Those of us who were around in the 1980s are brutally aware that majority shareholders lose control when companies are highly leveraged and get themselves into trouble. In that situation the lenders take full control and shareholders have limited rights.

This is occurring with a number of companies at present, including PGG Wrightson.

Farmer resistance to outside capital could ultimately weaken their control because it forces Fonterra to borrow more and more and these lenders rank ahead of farmers, both in terms of their supplier and shareholder roles.

There is a strong argument that farmers would have more control of Fonterra if the co-operative issued new capital to outside shareholders, farmers continued to hold a clear majority of the shares and the new capital was used to repay debt.

If outside capital is used to repay debt then farmers are in a better position, particularly as far as their supplier role is concerned.

Cactus Kate also recognises the danger of too much debt:

Farmers are now likely to fund Fonterra’s restructuring after wide-spread rejection of an NZX listing.

We know what that effectively means. Something that was problematic in 1987 to New Zealanders – they will have to borrow more to buy shares.

The overseas banks will fund Fonterra’s restructuring.

She also suggests a solution:

Rather than limit the ownership of shareholding to farmers in New Zealand they could and should widen the issue to beneficiaries of family or trading trusts owning these farms. There must be thousands of such beneficiaries out there with spare cash earned in others sectors of the workforce to plug some of the gap.

That could effectively happen now if beneficiaries lent money to the farms. However, the shares wouldn’t be in the beneficiaries’ names and Kate thinks farmers might be too proud to ask for loans.

 So why not issue shares to the beneficiary instead of a loan? The beneficiary of the trust is related to the farm with an equitable interest in Fonterra, they are not entirely unrelated parties which would be saleable to farmers as there is no control interest lost or overseas take-over attempts possible.

The voting rights could remain with the farm to which the beneficiary is tied to, yet the equity be issued in the name of the beneficiary related. While it will not raise all the money required, surely reaching into the pockets of the wider Fonterra community is preferable to putting individual farms further at the mercy of overseas owned banks with more debt stresses?

She suggests that shares could also be issued to individuals who have an interest in dairy farms through corporate or collective ownership.

That could happen indirectly now if individuals lend to the farm but it would still be the supplier not the lender who owned the shares. Kate’s plan would allow the lenders who are already financially committed to farms to own shares as individuals.

Voting shares are tied to milk production so farmers would retain control but the catchment from which capital could be raised would be increased.

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