Capital structure review underway

This week, the annual Fonterra network conference in Auckland will hear from the co-operative's board and management.

Over the coming months, farmers will have the chance to share their views through a series of meetings and webinars.

Fonterra says if the appetite for change remains, the board will do further work to refine the preferred option or options and have a second round of consultation.

Any changes to the co-op's capital structure require 75% approval from voting farmers. A farmer vote will take place around the co-op's annual meeting in November.

If the preferred outcome is to buy back the Fonterra Shareholders Fund, it would also require the approval of 75% of votes from voting unit holders.

Fonterra chairman Peter McBride says it has been talking to the Government about the proposed changes. As some aspects of Fonterra's current capital structure are reflected in the Dairy Industry Restructuting Act 2001 (DIRA), changes to legislation by Parliament will be needed.

McBride notes that DIRA enabled Fonterra to be formed so that an efficient co-operative of scale could lead New Zealand into global markets.

The value Fonterra creates is returned to regional New Zealand, where it plays a strong role helping to sustain local communities and enhance their wellbeing, he says.

McBride says Fonterra's board has spent a significant amount of time looking at a wide range of options, including staying with the current structure.

It has a preferred option: a "Reduced Share Standard with either No Fund or a Capped Fund", which has unanimous support among the board and management.

McBride says the board believes the best option for the co-op is to move to a structure that reduces the number of shares a farmer would be required to have and either removes the Fund or caps it from growing further, to protect farmer ownership and control.

Under this option, the minimum requirement for farmer owners would be one share for every four kgMS supplied to the co-op, compared with the current requirement of one share for every kgMS supplied.

At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply.

But farmers will be encouraged to share their views on these and other features, adds McBride.

"This would make it easier for new farmers to join the co-op and give more flexibility to existing farmers who may want to free up capital or who are working through succession.

"A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market.

"I want to be clear that these changes could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in the market. Ultimately the price for farmers' shares would be determined by the performance of the co-op and trading between farmers.

"We believe this is a more sustainable proposition over the longer term than the alternatives we are confronted with."

McBride says this is the board's current thinking, but they are open minded about adjusting that direction based on farmer feedback on any of the options.

"We want to hear from as many of our farmers as possible. I strongly encourage all farmers to consider the information provided and participate in the consultation process that started today and continues over the coming months."

Some of the alternative structures the board considered include:

• dual share structures, which would move from the current single co-operative share to a compulsory supply share and a separate non-compulsory investment share

• unshared supply structures

• a traditional nominal share structure

• a split co-operative model

McBride says the co-op's capital structure needs to be addresses urgently.

He notes there is a real sense of optimism in the co-op with its improving financial performance and how it is travelling generally.

"But the issues raised through this review need to be addressed early. Waiting for the problem to be at our feet will limit our options and likely increase the cost of addressing them, at the expense of future opportunities for us," says McBride.

FSF Capped

Fonterra has temporarily capped the size of the Fonterra Shareholders' Fund by suspending shares in the Fonterra Shareholders' Market (FSM) from being exchanged into units.

This temporary cap came into effect when a trading halt on Fonterra shares was lifted. It will remain throughout the consultation process.

Fonterra says the decision to cap the fund size wasn't made lightly.

"It was clear from the outset that consultation for this review would be more challenging than last time because both shares and units in the Fund are traded securities and we need to comply with continuous disclosure rules.

"As we progressed the review and started looking into options that included buying back the Fund, we identified a risk that, if we started consulting on options for change without temporarily capping the Fund, the Fund size could have grown significantly and taken the option of buying back the Fund off the table before farmers had a chance to consider it."

Some of the options have the potential to see differences emerge between the price at which a share trades in the FSM compared to what a unit in the Fund trades at, with units trading at a higher price than shares.

If the temporary cap was not in place, anyone holding dry shares would be able to exchange them into units in the Fund. This could more than double the size of the Fund and make options that include buying back the Fund unaffordable in the context of our current balance sheet targets.

The co-op says the temporary cap was a necessary step to keep all of the options for change open while shareholders have a free and frank conversation at owners.