KEY POINTS:
Combat ready - it's the epithet du jour used by Fonterra chairman Henry van der Heyden and chief executive Andrew Ferrier as they prepare to put the Sanlu disaster behind them and get some much-needed public focus on the dairy giant's ambitious business plans.
The reality is that
while the melamine contamination at Fonterra's Chinese joint-venture has captured headlines with gut-wrenching stories over the affected babies the main issue facing the co-operative is how to further its international ambitions at a time of depressed commodity returns and against a background of ongoing global credit constraints.
This is no easy task.
Fonterra - like other blue chips in this country - is having to aggressively manage its balance sheet.
The importance of Fonterra's place in the economy is such that the Government will also have to more aggressively manage its own finances after last week's announcement that the dairy payout has been revised down again - this time to $5.10 per kg - in a move which means an expected $2.28 billion injection into the economy for the 2009-2010 season will not occur.
The upshot is less cash in farmers' pockets, less tax paid to the Government and less to spread around the community.
The situation is a difficult one.
In a prospectus released yesterday for Fonterra's new $300 million retail bonds issue the company noted the scope and extent of the global liquidity crisis cannot be predicted: "As a result, it is not possible to assess with any certainty any additional impact that the crisis many have on the funding, operations and activities of the Fonterra Group.
"While largely unpredictable, a sustained continuation and/or escalation of the current global liquidity crisis could adversely impact the business and operations of Fonterra and the Fonterra Group," the prospectus said. Fonterra is fortunate in that it has strong relationships with its banks, and, its AA- credit rating was recently confirmed by Fitch Ratings.
But it has little headroom given its debt-equity ratio of 57.4 per cent at July 2008 (new figures should be available when Fonterra reports its January 31 interim result around March 24) which Fitch notes is outside Fonterra's internal parameters of 45 to 50 per cent.
The company is conserving balance sheet strength by refusing to allow farmer shareholders to sell their shares back to the company, pocket the cash and then become contract suppliers.
But while van der Heyden and Ferrier are shoring up the company's finances, the scope to develop operations internationally will stay constrained until it addresses the real issue which is how to reduce its reliance on debt and access new capital to underpin growth.
There is also a limit to Fonterra's ability to fund "redemptions"- where shareholders cash out and take their business to competitors, retire or switch to other land uses.
The upshot is if the pressure on the balance sheet is to be relieved farmer shareholders need to look through the current difficulties and focus on the long term.
Blue Read - the somewhat direct chairman of Fonterra's Shareholders Council - chafes at the hyperbole over "combat readiness". But the reality is that both Fonterra's top brass and the council are moving past the fractious phase that followed the Sanlu revelations and an earlier capital restructuring plan that was aborted because farmers feared they would lose control of what is the largest commercial enterprise in the country.
Read - who with former council chairman and present Fonterra director John Monahan joined a full day news media briefing last week - indicates there is common agreement that Fonterra will remain a "fully integrated farmer-owned enterprise".
As for "combat ready"- the term has obviously fallen out of the work that investment banker Rob Cameron has been doing with the both senior Fonterra team and the council.
Cameron - who will be bound by the usual confidentiality provisions - won't speak openly about his task. But judging by an article he co-authored for Cameron Partners Insight series ("Surviving and Thriving in the New Order") the Fonterra team will have heard his basic five point message:
1. A tectonic shift is occurring in the environment.
2. Certain sectors and tiers of the market look capable of weathering the storm while others look extremely vulnerable.
3. Possums in the headlight will become road kill.
4. The good news is that there is still time.
5. It is possible to thrive in this environment and leapfrog the competition.
Of critical interest to Fonterra right now are the first and fifth points.
Ferrier has at times exhibited all the symptoms of a first-rate possum as he dealt with the long-running Sanlu saga - which still has a few more iterations to go before it drops off the public radar.
But the reality is that if Fonterra does not get its act together the redemption risk will simply increase if confidence diminishes.
The problem is stark.
Fonterra's international competitors are not standing still. If the international turmoil goes on (some estimates suggest four to five years before normalcy is restored) there will inevitably be an ownership shakeout.
But the opportunity is also immense if the company can refocus in a way that consigns the immediate issues of lower commodity prices and the resultant balance sheet tension as a mere (business as usual?) operational issue and address the real challenge: what strategy should Fonterra employ to get the most leverage out of the international conditions; what is the appropriate group structure to deploy; and, finally, how to get away from the reliance on debt funding.