Fonterra intends to cap its decade-old shareholders’ fund so that unitholders won’t get a big buy-back offer to wind up the fund.
They will, however, join in a proposed return of capital and receive forecast higher dividends.
Fonterra chair Peter McBride says farmers surveyed during the capital restructure consultation were evenly split over whether to wind up the fund or keep it going.
More than half of the 107 million unit securities issued are owned by farmers and ex-farmers, who are therefore affected by the proposed capping.
But independent and institutional investors, lured by the initial public offer (IPO) in 2012 to participate in the financial rewards of New Zealand’s largest company, won’t be happy.
The $5 trading price for units on the NZX has fallen below $4 since the capital restructuring was first announced, both prices below the IPO of $5.50.
Nine years of dividends have amounted to $1.82, but they include a nil payment, one 5c and two 10cs.
Fonterra Shareholders’ Fund (FSF) chair John Shewan has published a detailed and strongly worded update for holders of units.
The capital review subcommittee of FSF is clearly disappointed by the revised capital structure proposal.
“Fonterra thinks it would be better to use its capital to support liquidity in the supply share market than use it to buy back the fund,” Shewan said.
“It says the fund will continue to provide a mechanism for people not involved in dairy farming to invest in the future of the co-op.”
The subcommittee argues the fund has fulfilled the role set up by Trading Among Farmers in 2012.
Most farmers rank ownership and control of Fonterra as their top priority.
“It seems unlikely these concerns will be resolved by capping the fund,” he said.
“Retaining the fund but removing features that support growth, liquidity and relevance to investment markets could put downward pressure on unit pricing.”
This period of change was an ideal break point in the life of the fund, the subcommittee said.
Fonterra has responded to the subcommittee, saying that providing more clarity on strategy and forecast improved earnings should make unitholders and shareholders more aligned.
A return to sustainable 40c dividends (previously achieved twice in 2015-16 and 2016-17) would provide a good yield on unit investment.
Fonterra is also holding out the carrot of return of $1 billion capital by 2024.
McBride says FSF unit holders, representing 6.7% of Fonterra’s issued capital, would participate in that distribution.
That $1b would be about 18% return of both supply share and investment unit capital on current trading prices. The fund sits at $420 million market capitalisation.
Trading prices of the fund and supply shares have diverged recently – $4 for FSF and $3.25 for Fonterra shares.
Shewan and McBride said consultation between the company and the fund would continue.
