Friday, March 29, 2024

Fonterra’s debate drags share price down

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Fonterra supply shares and fund units both dropped in price following the capital restructure announcement, which analysts say is the predictable market response.
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A cloud of uncertainty hangs over the market while Fonterra’s farmers ponder capital reform before a possible vote at the annual meeting in November.

Supply shares (FCG), now only tradable among farmers, lost $1 immediately following the proposal and have since recovered half of that fall to be around $4.

Fonterra Share Fund (FSF) units fell from $4.60 to $3.98 and have recovered to $4.10.

Craigs Investment Partners says the proposal raised incentives for short-term trading in shares and units, independent of the fundamentals.

Because the conversion of dry shares into fund units has been suspended and the proposal contains a 1:4 supply requirement in future, the farmer-only share market will be potentially swamped with sellers.

Units could fare better because Fonterra has suggested a buyout of the fund, which would have to be pitched at an attractive level to gain 75% approval from unitholders.

But farmers will not want the fund offer to be too high while their own share price is languishing. 

Jarden head of research Arie Dekker says the ramifications of closing or capping the fund need very careful consideration by farmers.

Reducing the investor participation could restrict demand for shares in the future and have the burden of funding the co-operative fall on a shrinking number of farmers.

Alternatively, Fonterra could continue to sell down mature and non-core assets and reduce its capital base with a distribution alongside a reduction in the share standard, he suggested.

If the fund was retained for share fungibility it could grow without threatening farmer control because units have no voting rights.

Economist and former Treasury analyst Peter Fraser says the proposal doesn’t promise any new capital, especially external or non-farmer capital.

As milk production falls, the share market is going to be dominated by sellers.

“Cue a recipe for substantial value destruction in terms of shareholding farmers’ wealth from a potentially highly illiquid market,” Fraser told BusinessDesk.

Forsyth Barr senior equities analyst Chelsea Leadbetter says uncertainty has increased and there are now several possible outcomes for shareholders and unitholders.

After either buying back or capping the fund, Fonterra would be still exposed to falling milk production and the risk of stranded assets.

“Trading of shares in a restricted market with a limited investor pool is likely to result in a lower share price,” Leadbetter said.

But the market for units has more positive short-term signs, particularly if a buy-back firms up.

Speculators may buy FSF units in anticipation of a gain from the buy-back offer, Leadbetter suggests.

Federated Farmers dairy sector chair Wayne Langford encouraged all his fellow Fonterra shareholders to get involved in the consultation over the next 10 days.

“It’s a once in a decade conversation that has only just begun,” Langford said.

Langford was at a well-attended meeting in Takaka where Fonterra chair Peter McBride spoke, along with director John Nicholls.

“Short-term issues with the share value and the unit fund are being addressed for reasons of farmer ownership of the multigenerational co-operative,” he said.

“Unitholders have a different view and different investment drivers which are more short-term.”

Langford urged farmers to make their views known to Fonterra Shareholders’ councillors before their next meeting on May 26.

Analysts agree that farmers are effectively being asked to take a short-term hit on share capital to deal with FSF to strengthen the co-operative’s foundation.

There is wide agreement that a reduced share standard will bring several benefits.

Many farmers will date their shareholdings back to before Trading Among Farmers (TAF) and the market share price, to the time when a share price was an auditor’s construct or, earlier, a nominal value.

Can 75% of them see their way through this period of reform and uncertainty to the other side?

A Fonterra source says the company directors and executives were under no illusion that 75% approval of an alternative structure would be hard to achieve.

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