KEY POINTS:
Fonterra chairman Henry Van der Hayden is excited about the upcoming meeting at which he will propose a major capital restructuring plan to some 11,600 dairy farmers, which could radically change the way the country's biggest company does business.
Fonterra's board and senior management want to bring outside capital into the dairy co-operative to help finance an aggressive international expansion that will enable it to keep pace with competitors.
Van der Hayden broke from a meeting late yesterday afternoon to stress farmer control is essential to the capital restructuring plan. The co-operative will remain central to Fonterra's structure.
But the industry does need to face up to some big shifts. "I've absolute confidence that as farmers and as businesspeople we'll do the right thing. We've made difficult decisions before."
On Friday, Fonterra hosed down as inaccurate an NBR report saying its directors are backing a proposal that would see the giant dairy company having two classes of shares. This would give farmer and non-farmer shareholders almost equal exposure to the whole company.
The NBR story was not without legs. A variant of that proposal is expected to be on the table with five other possibilities - including the board's preferred option - which have been developed by the company's capital restructuring team over the past 12 months.
This might include the flotation of some of Fonterra's key brands, such as Anchor, Mainland and Tip Top, to bring in much-needed cash to fund its expansion into the international liquid milk business. A partial float of the brand's business could still leave the co-op continuing to maintain a control stake.
Van der Hayden, who leads the team comprising representatives from the board and senior management, clearly does not want to alarm his co-op members by commenting on any prospects for an NZX listing (either partial or via the flotation of subsidiary or special purpose companies in which Fonterra would retain a controlling stake) before they are laid out at a special meeting in Christchurch on Thursday. It will be broadcast to farmer shareholders in other centres.
But Fonterra chief executive Andrew Ferrier indicated in Beijing earlier in the week that Fonterra is considering listing and had scheduled a special meeting to discuss what "will be the first step in a long journey".
Right now, Fonterra is an unlisted co-operative owned by around 11,600 farmers. It is New Zealand's largest company, controlling about a third of the world's trade in dairy exports.
It has managed to internally fund offshore ventures, such as its stake in China's Sanlu. But it lacks sufficient capital to keep pace with the expansion of its international competitors, particularly into the high-growth liquid milk market which requires Fonterra to make multimillion dollar behind-the-border investments if it wants to be a player.
Fonterra expects the growth in global dairy consumption will come with liquid dairy, not the commodities end of the spectrum, which is its prime price market.
Liquid dairy is expected to grow by 3 per cent annually compared with the 1.5 per cent annual growth projection for the ingredients business. And although Fonterra does not go out of its way to say so publicly, the shift to exploiting the trend to localism in other markets will also provide an insurance policy if the food miles hysteria affects its global commodities trade.
At a briefing this year, Van der Hayden and Ferrier stressed that if Fonterra didn't make changes to its capital structure, it would revert to being a regional commodities business.
The capital restructuring proposal has four key elements:
It must address the redemption risk the company faces if too many older farmers cash out at once;
It must introduce flexibility so that farmer or agricultural shareholders gain the ability to ensure that not all their eggs are tied in one investment basket;
It must introduce new capital so Fonterra can further its ambitions in an international environment where other companies are consolidating by gobbling up competitors; and
It must provide capital for new behind-the-border investments in the high growth area of liquid milk.
Fonterra also has to consider its fair value shares, which, at $6.76/kg milk solids are nearly double the original price, and a barrier to entry for younger farmers.
And Fonterra must work through any capital changes while maintaining its focus on being a low cost supplier in commodities.
Van der Hayden and Ferrier had planned to put the restructuring proposal to farmer shareholders in September but they have since had to engage with the Government on the changes that will need to be made to the Dairy Restructuring Act to enable changes to be made to the company's constitution.
NZ First has been an obvious sticking point with its antagonistic opposition to any moves that open the way to foreign capital in New Zealand's biggest industry.
Fonterra has tested the water with the Government, which has appointed a cross-departmental team to examine the impacts of the proposed changes.
But, while Van der Hayden emphasises the company clearly has to get the agreement of all its key stakeholders, which includes the Government, the primary considerations will be the views of farmer shareholders.
There couldn't be a better time to make substantial change in the industry. Dairy prices have soared at the commodity end of the spectrum which should make farmers less risk-adverse. International prices for most dairy commodities have doubled in the past year, and a recent Agrifax report said there was little sign of those appreciating prices slowing.
But the price of prime dairy manufacturing companies is also on the rise. Across the ditch, Japan's Kirin Holdings recently acquired National Foods from San Miguel, which beat Fonterra in 2005 for the battle to scoop up Australia's biggest dairy and juice products business.
Kirin paid a one-third premium over the price San Miguel stumped up two years ago.
Right now, the Australian dairy co-operative Dairy Farmers, which announced a fall in fiscal 2007 profits as a result of the impact of drought, is planning to convert from a co-operative to a leading dairy consumer goods manufacturer.
Dairy Farmers is also looking to improve liquidity and a listing on the ASX Exchange (expected to raise between A$800m-$1bn) is thought to be its preferred option. The company has also said it would consider a sale if it provided the correct value to shareholders.
Fonterra is on the list of prospective bidders.
NZX executives have long pushed for Fonterra to make a partial listing.
If Fonterra's farmer shareholders approve the option, it will give a much-needed fillip to the New Zealand stock exchange, which has a dearth of blue-chip companies.
The New Zealand market's capitalisation has grown at just 1 to 2 per cent a year over the past decade. Much of this is because of the number of companies exiting the bourse. If Fonterra comes on board it will be good moos for investors.
