Fonterra share plan would wipe off $1b equity, says rival

Photo / Brett Phibbs

Plans by Fonterra for share trading among its dairy farmer owners could wipe out $1 billion of shareholder equity, says rival Open Country Dairy.

Farmers buy and sell shares from Fonterra based on their level of production but under a proposed change would start trading shares among themselves.

The first two steps in a capital re-structure of the co-operative were approved in November, changing the way shares were valued and allowing farmers to buy non-voting shares beyond that required by production.

A brochure by Open Country Dairy - delivered this week inside copies of Dairy News - said Fonterra's own independent valuer forecast a drop in share value of up to 30 per cent in a restricted market.

"That amounts to $1 billion of shareholders' equity wiped out," it said.

Fonterra's proposal offered no share price safety net and volume would only be created at fire sale prices, Open Country said.

Under the proposal a Fonterra Shareholders Fund could raise money by selling investment units and help farmers free-up cash by paying them for the right to dividends and the gain or loss in share value.

Open Country said unit holders in the fund would not invest without an attractive dividend and yield.

"By definition a higher dividend leads to a lower milk price," it said.

Laurie Margrain, chairman of Open Country Dairy, said Fonterra's proposal would restrict competition.

"The dairy industry, the country, needs a strong Fonterra, we're very supportive of that," Margrain said. "But we think we need a degree of competition and we need an open market in order for that to happen."

Fonterra chief financial officer Jonathan Mason said Open Country Dairy was scaremongering.

"It's always telling when a competitor reacts so strongly," he said.

Fonterra set the estimated fair value share for the 2010/11 season at $4.52, the base price under changes approved last year.

Valuer Grant Samuel had estimated a fair value range mid-point of $5.10 and a restricted market value mid-point of $3.83.

Fonterra would not launch share trading among farmers if it thought the share price would be less than $4.52, Mason said.