KEY POINTS:
The investment community has welcomed Fonterra's proposal to create a second company and list it on the stock exchange but says major hurdles need to be overcome first.
Yesterday the dairy co-operative, which is New Zealand's largest company, announced a proposal to keep its farmer co-operative but shift
all its assets, liabilities and operations into a second company.
Shares in the second company would then be listed on the stock exchange with 65 per cent held by the original co-operative, 15 per cent initially owned by farmers and 20 per cent offered to the public.
The company wants to change its structure to allow for capital investment, giving it the money needed to expand the business globally.
Fonterra chairman Henry van der Heyden said the proposal was an even bigger step than the three-way merger which formed Fonterra six years ago.
"What we are considering is a further evolution of our co-operative to enable Fonterra to continue to adapt, to ensure it remains relevant and competitive in the changing global dairy market.
"We have bitten off these challenges before and added value to the co-operative. We just have to do it again."
Farmers will have until May next year to vote on forming the second company and then another two years to decide whether to list it.
The earliest listing point would be 2010.
Both votes would have to be passed by 75 per cent or more.
Tyndall Investment Management domestic equities manager Ricky Ward welcomed the proposal and said people had been crying out for this sort of investment.
"There has been limited ability to get access to the agricultural sector. It would be looked upon pretty favourably."
ABN Amro Craigs analyst Mark Lister said he too welcomed the proposal.
"This is New Zealand's biggest company and the most important sector for us as a country. Unless you have got $6 million to buy a dairy farm it's pretty hard for the average Kiwi to get exposure to that sector at the moment.
"It is brilliant news for capital markets, brilliant for KiwiSaver and good for farmers, too."
But Lister was also quick to point out that the proposal was not a done deal, and two years was still a long time off for investors.
"We are not around the corner yet. Who knows what will happen between now and then. The 75 per cent voter level is a big hurdle which means they will have to do a good job of convincing the majority."
Lister said the long timeframe came as no surprise.
"It was never going to happen overnight. There are a lot of parochial farmers that have to be convinced."
Macquarie Equities investment director Arthur Lim said New Zealand was one of the few places in the world where investors could not gain access to its main industry through the sharemarket.
"Australia has resources, Japan the car market. New Zealand is quite unique in that we have an agriculture base, but the reality is investors in New Zealand have not been able to get exposure to the dairy sector even though it is our biggest industry. Any move in that direction would be welcome."
Lim said 2010 was still a long time away, but at least the company now had a road map and something to work towards.
NZX CEO Mark Weldon said, as New Zealand's largest company, Fonterra was fundamental to the country's current and future economic health. He described the capital structure proposal as brave and aspirational and gave it the full support of the exchange.
"If farmers determine to support the preferred capital structure, NZX would be honoured to work with Fonterra to support it in becoming an even more successful global company, owned and operated from a strong New Zealand farming base."
But Weldon would not be drawn further on the consultation process or its lengthy timeframe.
"Fonterra has a comprehensive consultation period ahead. We need to respect that, therefore it is not appropriate for NZX to be commenting on a process that is for Fonterra and its shareholders to engage in," he said.
Goldman Sachs JBWere economist Shamubeel Eaqub said the listing would bring much-needed depth and breadth to the New Zealand sharemarket.
"Having a company like that ... There will be huge benefits to our financial market."
Eaqub said the share of GDP from the capital market had not grown much over the last few years, but with KiwiSaver coming and the potential Fonterra listing, it could receive a significant boost.
"It would be fantastic to have greater savings and investment ownership in our main industry. If you look at the number of companies on the NZX-50, the size of them gets pretty small once you get past the first few."
Eaqub said he expected the investment to prove very popular with foreign investors.
What happens next?
* Fonterra's board yesterday recommended to farmers that all of the company's assets, liabilities and operations be split from the co-operative and listed.
* Fonterra farmers will have to vote twice, two years apart, for the scheme to go ahead.
* The first vote, expected in May 2008, will be to split Fonterra into a milk-supply cooperative and a subsidiary company, and to introduce a more transparent milk-pricing mechanism.
* Farmers will still have 100 per cent ownership of the companies.
* Over two years Fonterra will refine its milk pricing; build farmer confidence; and seek acceptable sharemarket conditions, listing value and enabling legislation.
* In 2010, farmers will vote again on whether the Fonterra subsidiary should list on the NZX and sell shares to raise external capital.
* Directors expect that the farmer-owned cooperative will at that stage own 65 per cent of the listed company, farmers will individually hold another 15 per cent stake and about 20 per cent will be sold to institutional investors and members of the public.
How long is a cow's tail? Analysts cautious on share price
Fonterra will clearly be a very big listing for the New Zealand stock exchange if it goes ahead but market commentators believe it is too early to put a value on the company or its possible share price.
ABN Amro Craigs analyst Mark Lister said that while the outlook for the dairy sector remained positive a lot of things could change between now and the proposed listing in 2010.
"$8 billion plus is probably in the right realm but between now and 2010 things might change."
Lister said the annual fair value report, undertaken by an outside consultant to regulate the milk price, probably used similar systems as the public sector but it was hard to really know the company's worth as private companies had no reason to be open about their values.
Macquarie Equities investment director Arthur Lim said the pricing would reflect how well Fonterra was doing at the time.
"If it continues to be very strong there will be a good price for Fonterra when it lists." But Lim said trying to put an exact figure on it now was like answering the question "how long is a piece of string?"
"Fonterra is not the most transparent of entities, with listing there will be the transparency to provide the market with the information to value the shares."
As of May 31 this year the company had nearly 1.28 billion in co-operative shares which at the current share price of $6.79 would put the company's market capitalisation at just under $8.7 billion. Telecom has a market cap of just under $7.7 billion.
What the experts think
"If farmers determine to support the preferred capital structure, NZX would be honoured to work with Fonterra to support it in becoming an even more successful global company."
Mark Weldon, NZX chief executive
"What we are considering is a further evolution of our co-operative to enable Fonterra to continue to adapt."
Henry van der Heyden, Fonterra chairman
"There has been limited ability to get access to the agricultural sector. It would be looked upon pretty favourably."
Ricky Ward, Tyndall Investment Management
"New Zealand is quite uniquein that we have an agriculture base but the reality is investors in New Zealand have not been able to get exposure to the dairy sector even though it is our biggest industry."
Arthur Lim, Macquarie Equities
"It was never going to happen overnight. There are a lot of parochial farmers that have to be convinced."
Mark Lister, ABN Amro Craigs
