KEY POINTS:
Fonterra directors might this year pitch a public sale of 49 per cent of the co-op's $3.7 billion consumer brands business as a solution to festering tensions in its capital structure.
A big shareholder of the farmer-owned business has told the Business Herald the proposal would emerge during discussions this year between farmers, directors and management over fundamental changes to its capital structure.
The suggestion from the shareholder, who did not want to be identified publicly, follows a recent call from another major shareholder - New Zealand's biggest corporate farmer, Landcorp - for Fonterra to consider splitting its farmer-owned shares into two.
Landcorp chief executive Chris Kelly suggested one share, covering the value-add part of the business related to activities such as branded consumer products, could be tradeable. The other share could cover returns from commodity products.
It is not a new idea. Mooted in the run-up to Fonterra's creation from a controversial industry mega-merger in 2001, the concept was torpedoed as being against the co-operative spirit.
But the performance of Fonterra's value-add business is a continuing disappointment to farmers. Last year it returned just 25c in a $4.10/kg of milksolids payout. A compelling reason for forming Fonterra was so farmers could capture value-add returns and rely less on commodity earnings. Farmers are now resisting having their investment dollars locked into this business.
Currently only milk suppliers can directly own shares in the co-op, which was responsible for $13 billion, or around 20 per cent of New Zealand's export earnings, last year.
Fonterra chairman Henry van der Heyden said "fundamental" change was necessary to counter "[share] redemption risk" and provide capital for growth.
All options were on the table for discussion, but many would be redundant once farmers identified their "non-negotiable" positions, he said.
Farmer watchdog the Fonterra Shareholders Council has said farmers must stay in control of the business.
Essentially what farmers will have to decide is if there is a difference between "ownership" and "control" of their company.
Directors are addressing "redemption risk" because Fonterra is bleeding suppliers who are cashing in their shares.
Van der Heyden said the redemption risk was not "short-term".
A spokesman added that Fonterra had to consider how to raise capital for growth 10 years ahead.
Van der Heyden said a board recommendation for change would be put up for vote to the co-op's 11,000 shareholders by the end of this year. He declined to discuss restructuring options, likely to be presented to farmers after August.
Directors will need 75 per cent support to pass any recommendation.
That could be a tall order despite widespread dissatisfaction with the capital structure.
Fonterra's share price - assessed annually by an international valuer on projected earnings and set by Fonterra directors - is out of kilter with recent payouts and is considered to be a restraint on production growth.
Generally, farmers have to buy one share for every kilogram of milksolids supplied to Fonterra. The current share price is $6.56 and average milk production per season is 100,000 kg.
Fonterra's shareholders, with $5.1 billion invested, are the major funders of the company, which in 2005-06 reported net interest-bearing debt of $5.6 billion.
