4 Report highlights farms at risk Vol 19 No 18, May 10, 2021
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Fonterra floats deep reform
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Hugh Stringleman hugh.stringleman@globalhq.co.nz
ONTERRA may be reformed with farmeronly shares of lower value and a share standard reduced by one-for-four in the preferred new capital structure. Six months of consultation have begun on options to change the structure to give farmers greater financial flexibility. If a general agreement emerges, shareholders could vote on a new structure at the November annual meeting where 75% majority approval would be required. The Fonterra Shareholders’ Fund (FSF), the mirror market which sets the value of supply shares, has been temporarily capped in size and may disappear in the future. The preferred option contains a buy-back and termination of the fund, or a permanent cap and a gradual shrinkage. Fonterra’s big public announcement on capital restructuring contained bombshells:
Fonterra’s board will really need to work hard to ensure it communicates this whole issue to get farmer support on it. Stu King Farmer
PROPOSAL: Fonterra has entered a consultation process on its capital structure, which could result in greater financial flexibility for farmers. •Milk supply will decline 100 million to 250m kgms of milksolids in the next decade. •Dry shares could blow out FSF twice its present size. •After a decade of TAF, FSF would be a cuckoo in the nest at 16%-20% shareholding, threatening farmer ownership and control. •The $525m fund (at $5/unit) could grow to $1.2 billion before a potential buy-back. •Exchange of dry shares for units in the fund has been suspended. Fonterra has also placed on hold the share standard compliance obligations for the new season because of the uncertainty now surrounding capital structure.
Chief financial officer Marc Rivers would not be surprised to see FSF units behave differently to Fonterra supply shares (FCG) in the short-term, until any new capital structure is agreed. Nothing in the discussion documents or preferred proposal addresses the holders of 107m FSF units directly. They have not done well financially during the time that Trading Among Farmers (TAF) eliminated redemption risk for the co-operative and set market prices for units and supply shares. After reaching a peak over $8, FSF units fell as low as $3.50 and now sit at $4.60. Fonterra now believes the unit
market is the tail wagging the supply share price dog. “Because of the changed context, it is important to have discussion with the owners of the co-operative,” Rivers said. The preferred option leans towards buying back the fund sooner rather than later “but not at any cost”. Buying back is subject to an offer being made and 75% of fund unitholders accepting that offer. Chair Peter McBride says the capital structure committee considered as many as 100 different types of producer co-operatives around the world and in different industries, especially the hybrid types that
Fonterra has become. Alternatives included the traditional nominal share price, an unshared supply, a split cooperative with a value-add entity and outside investors, and dual A and B share model. He says they failed the test of farmer ownership or financial sustainability. Only the reduced share standard model, with or without the fund, ticked all the boxes. However, a farmer-only share market would come with a “restricted market discount” of 20-25% compared with prices that would be expected for a listed share with good fungibility.
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