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:
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 co-operative 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.
In circumstances where more farmers wished to sell rather than buy, such as milk supply decline, low prices or drought, there would be sell-side pressure on price.
Because some aspects of the capital structure are reflected in the Dairy Industry Restructuring Act, some changes to legislation would be necessary.
McBride says a strong, farmer-owned dairy co-operative with a viable capital structure was firmly in the national interest.
Hauraki Plains farmer Stu King says Fonterra’s review of its capital structure comes down to necessity, and a need to ensure it can continue to secure strong, solid milk supply under a considerably more competitive environment than when TAF was established.
“We need to compete strongly, and cannot afford to lose any farmers. We need an ownership structure that will encourage farmers to want to come and join the co-operative,” King said.
However, he says he struggled to see how the non-voting shares in the fund could influence the farmer share portion, but acknowledged that it could signal a shift in share-holding portions.
“Fonterra’s board will really need to work hard to ensure it communicates this whole issue to get farmer support on it,” he said.
Mid Canterbury dairy farmer Frank Peters is “bit mixed at the moment” with his thoughts on Fonterra’s capital structure change proposals.
“I’d like to see more information attached to the ideas they are putting forward. I can’t wait for the consultation and the clarification on how they think it will work,” Peters said.
“The biggest question is if we go in-house, do the rules still stand because we are not in the open market? A lot of people have spent a lot of money on shares, I will hate to see that value lost and there’s a feeling Fonterra wants to retreat more.
“Yes, it’s getting back to our knitting, but we have got to stay on track and not end up being devalued.”
Waikato Federated Farmers dairy chair Ben Moore says the proposals released by Fonterra were the start of an important conversation that would lay a platform within the co-operative for the next 10-20 years.
He encouraged farmers to get engaged in the process and take their time to read the proposals.
“It’s great to see Fonterra put out some direction of thinking, however, there’s still plenty of room for discussion and input,” Moore said.
The board’s preferred option around a ‘Reduced Share Standard with either No Fund or a Capped Fund’ pleased him because it showed Fonterra was looking to resolve intergenerational ownership of the co-operative by making it easier for younger farmers to buy into it.
“I’m pleased to see Fonterra is front footing the issues around future milk supply, farm successions and flexibility in maintaining and strengthening our ownership and control. From a young person’s point of view, this is awesome,” he said.
