Shareholders able to double investment in dairy giant

Fonterra chairman Sir Henry van der Heyden

Shareholders in Fonterra will be able to invest in shares up two times their annual production rate, almost double that of current rates, the dairy giant announced today.

Fonterra this afternoon announced the third stage of its capital restructure in allowing farmers to trade shares among themselves, in a move away from shares being issued or redeemed at a price set by the Fonterra Board.

The possible changes to capital structure would mean more flexibility for farmers to buy and sell shares to match their cashflows, while providing Fonterra with permanent share capital to grow shareholder returns.

These extra so-called "dry" shares could only ever be 20 per cent of the total shares on issue, unless extreme circumstances prevailed such as a drought when this could be extended by five per cent.

Trading among farmers is the final step of a three-step process aimed at protecting and strengthening the co-operative.

The first two steps were approved by farmer shareholders last year and included the provision for farmer shareholders to own additional dry shares beyond their current or expected milk production levels.

Fonterra chairman Sir Henry van der Heyden said all three steps were developed to ensure Fonterra remained 100 per cent controlled and owned by farmer shareholders and that the co-operative remained focused on paying the maximum sustainable milk price.

In other proposed changes a new Fonterra Shareholders Fund would be devloped to help farmers purchase new shares or retain shares they would otherwise have to sell.

The fund would pay farmer shareholders for the right to receive dividends and any change in the value of those shares, allowing farmer shareholders to free up cash.

However farmers would still get the same milk prices, retain voting rights and technically own the shares.

Farmers could then buy back their entitlement to dividends and any change in the share price at the prevailing market price.

The fund would raise the money it needed to pay back farmers by selling investment units.

van der Hayden said it was the right time to consult with farmer shareholders on possible further changes to the co-operative's capital structure.

"We have managed redemption risk reasonably well so far but it may not work as well in the future," he said.

There was the risk of strongly capitalised or subsidised offshore investors entering New Zealand and paying unsustainably high prices for milk to get a foothold, he said.

If this happened, Fonterra could face considerable redemptions - putting its balance sheet under significant financial stress.

"The reality is that the current system penalises loyal shareholders who effectively fund the return of share capital to farmers leaving the co-operative," he said.

van der Hayden said trading among farmers was an opportunity to secure Fonterra's leadership in the New Zealand and global marketplace by having the financial capacity to strenghten its regional consumer products businesses.

"It will make the co-operative better palced to grow returns - not just for today's farmer shareholders, but for generations to come," he said.

van der Hayden urged all farmer shareholders to get involved in the consultation procees and have their say about the future of the co-operative.

In a statement, the Fonterra Shareholders' Council today welcomed the co-operative's move to consult with shareholders on Trading Among Farmers.

"The Council supports the concept of Trading Among Farmers and we now want shareholders to help shape a final proposal that will see Fonterra continue to meet our co-operative's needs," said council chairman Blue Read.

MAIN POINTS OF PROPOSAL

The proposed details for Trading Among Farmers include:

* Giving famer shareholders the choice to invest in extra dry shares up to a maximum of 2 times their annual production (2 shares per kgMS from the current 1.2 shares per kgMS.) The Board would target an overall cap on dry shares at 20 per cent of the total number of shares on issue, with provision to extend the cap by 5 per cent in extreme circumstances.

* New and current farmers would be able to share up over three years to cover additional production, while exiting and current farmers would have up to three years to sell their Fonterra shares.

* Farmers would receive a higher price for share-backed milk compared with unshared milk to encourage them to back their production with shares as quickly as possible. Only shares backed by milksolids would have voting rights.

* Farmer shareholders could choose to buy or sell shares among themselves via the Fonterra Shareholders Market. Those farmer shareholders who did not want to go through the process of buying and selling shares would not have to do anything; Fonterra would buy and sell shares for them via the market, at the current market price, to match their production following each season.

* A range of mechanisms would be put in place to ensure there was a sufficient volume of shares to buy and sell. One or two substantial financial institutions would be appointed to provide plenty of volume in the market and less fluctuation in price. These "Registered Volume Providers" would buy and sell shares in a similar way that banks buy and sell foreign exchange, with Fonterra setting their charges.

* A registered exchange would be contracted to provide the administrative platform behind Fonterra's farmer-only market.

* A new Fonterra Shareholders Fund would help farmers purchase new shares or retain shares they would otherwise have to sell.
- The fund would pay farmer shareholders for the right to receive dividends and the gain/loss from any change in value of those shares. This would enable farmer shareholders to free up cash.
- However, farmers would still be paid their full share-backed Milk Price, remain the owner of their shares and retain all their voting rights based on share-backed milksolids.
- Farmers could buy back their entitlement to dividends and any change in the share price when they wanted to at the prevailing market price.
- The Fund would raise the money it needed to pay farmers by selling investment units.
- It would target friendly investors such as sharemilkers and retired farmers. Institutions and the public would also be able to participate. Unitholders and the Fund would not have any voting rights in the Co-operative.

- with NZPA. Additional reporting from INTEREST.CO.NZ's blog