Why Zespri's shareholder numbers are under scrutiny

Damien O'Connor, Minister of Agriculture hopes Zespri's regulated status is not hindering its growth. Photo / Mark Mitchell

Agriculture Minister Damien O'Connor says it may be time to look at whether regulation governing global kiwifruit marketer Zespri is hindering its growth, though he would not step in unless asked to by the country's growers.

O'Connor had been asked for his view on Zespri's fallen shareholder numbers, with just 48 per cent of its 2500 growers now holding shares in the marketer, which has the statutory right to export all New Zealand kiwifruit, except to Australia.

The effect of the shareholder level was evident in Zespri management recently losing a grower vote for its proposal to expand overseas kiwifruit production of Zespri-branded fruit, in order to have the brand on global retail shelves year round.

Also of concern to last year's $4 billion kiwifruit sales achiever was that 1100 growers didn't vote at all.

While the vote was only narrowly lost - the proposal required 75 per cent support, it got 70 per cent - growers told the Herald one reason was unshared orchardists believed most of the returns from expansion would be in dividends, so they wouldn't benefit.

It was the second Zespri management proposal growers have voted down on the trot.

In July last year they failed to back a proposal to contain rogue growing of Zespri's best-seller SunGold variety in China, by getting alongside the unauthorised Chinese growers in a commercial growing and sales trial. Again this proposal got 70.5 per cent support.

A secondary proposal to use the Zespri brand label as part of the China sales trial in order to understand consumer response only got 64.1 per cent backing.

Zespri in a statement said it was considering a number of options to encourage unshared and "under-shared" growers to become shareholders. It expected to update the industry on potential options by the end of the year.

O'Connor said he was concerned if "a variation on a co-operative" ended up with a disconnect between its growers and control.

"A number of years ago there was a change in the (share) structure to try to align them - maybe it's time to look at that again to ensure a company guided by legislation is not being hindered in its governance and growth.

"It's not unusual to have tension between management and governance, it's healthy, but if it is hindering (the company) it bears investigation."

The last review of kiwifruit export regulations was in 2017. A further review of the regulations was not currently in his ministry's work programme, O'Connor said.

Zespri said in 2018 just under 60 per cent of its growers held shares.

Mark Mayston, chairman of grower advocate organisation NZKGI, said the shareholder level was a concern.

"There are groups of people who don't want to be shareholders - there's nothing you can do to change their minds.

"That is a little bit of a problem if we want our industry to be grower-owned and when you think about the regulation we operate under ... if you want the Government to keep that in place.

"The Government has always said this is a decision we make as an industry and we have no desire to deregulate. I envisage the Government from time to time looks at us and asks if the industry is grower-owned."

But Mayston doesn't think the industry's in danger of losing its statutory export privilege because of the shareholding level.

He believed changes to Zespri's shareholding structure announced in 2018 were now kicking in and over the next two years more shares would become available as "dry" shared-up former growers lost their entitlement to dividends and sold their shares.

Zespri said the biggest impact from the changes would come in 2025 when 24 million shares would become "dry", requiring 2.4m shares to be sold.

The company has 183,252,240 shares on the Unlisted Securities Exchange. Shares have traded between $6.60-$10.05 in the past 52 weeks.

The country's biggest kiwifruit grower, listed company Seeka, does not own shares in Zespri, having sold them to finance its infrastructure growth strategy, said chief executive Michael Franks.

"If a piece of the industry is rallied around a single desk, it probably does make sense to have a bigger shareholding (level). But it's how you achieve it that's important. We are interested to see how that plays out."

Asked if was important for Zespri's export strength to have more shareholders, Franks said: "It matters in the sense of having a cohesive industry and a cohesive marketing company representing the growers who have a stake in it.

"From that perspective it matters, but it shouldn't."

Zespri chief executive Dan Mathieson told the Herald it was important to have more growers owning shares "so they can benefit from both fruit returns and the success of Zespri as a corporation".

"Having better ownership of Zespri and also better grower alignment will also help ensure growers can be better involved in critical decisions to support healthy growth of the industry and the future of the industry.

"We are certainly focused on that at the moment, trying to work out how to help growers own more shares. It's not necessarily a quick fix."

Zespri headquarters at Mount Maunganui. Photo / Talia Parker

A veteran Tauranga grower and Zespri shareholder who declined to be named said if the number of shareholders continued to decline, the result would be tension between the activities of the company and where the returns and benefits ended up.

"Do they end up in the hands of a small number of shareholders or in the hands of everyone via fruit value?"

The grower did not believe the shareholder level threatened Zespri's protected statutory status - yet.

"But at the extreme, if you ended up with 10 per cent (of grower shareholders) then people would start asking the question is this effectively a privately-held company and why on earth do they have single point of entry (export desk) status?

"I'm not sure that's a valid argument but I'm sure someone would run it."

The grower did not believe the shareholding slide was a sign the industry was not as cohesive as it used to be.

"No, it's a function of normal attrition. People sell their orchards and look at the money and think of other things to do with it. It's a sign growers are saying they value their capital more than the return of 15-16 per cent (Zespri has achieved). It's happened with other co-ops and grower companies. It's quite common."

The grower said Zespri had some options for attracting shareholders.

The current royalty cash payment could be converted into shares for unshared growers.

"The difficulty after that is when you try to provide cash incentives for people to share up it dilutes the returns for current shareholders. If they tried that, they would get some pushback.

"If you're a new grower and you don't normally trade in shares at all - and a lot of people are in that situation - the (share buying) process with anti-money-laundering measures and requirements are onerous. Some people look at that and give up. That's an impairment to people getting involved."

The grower said another difficulty for Zespri leaders was that most of the dividends came from the company's growing-licence sales.

"The difficulty with that is the board can change that (the licence price) with the stroke of a pen so there's some uncertainty there, and that uncertainty plays into the share price and the desirability or otherwise of owning them.

"Growers are already under enormous (financial) pressure. Green (fruit) growers are probably not making a lot of money and a hectare of gold is not making what it used to."

NZKGI's Mayston said a strong shareholding level in Zespri was important because it made industry decisions easier to make.

"My personal situation is that I've been converting Hayward (green vines) to gold and simply haven't had the capital to put into shares.

"But I absolutely have the desire to do so and I've just started to put money into shares, but it's something to do over time for me. It hasn't been that easy ... the paperwork was a painful procedure ... and shares haven't been traded hugely, but I think the trading platform will become a lot more liquid over the next couple of years."