Dairy industry restructuring: Fonterra Details Future Financial Direction
September 21st, 2009
Fonterra’s farmers will be allowed to hold shares up to 120% of their production under the co-operative’s proposal to strengthen its capital structure, giving them access to ‘dry’ shares which get paid out the same as production shares. The aim is to reduce and then take redemption risk off Fonterra’s balance sheet – the hundreds of millions of dollars which wash in and out with changes in milk production. Chairman Henry van der Heyden says “we need certainty in our equity base to invest in dairy processing operations so as to drive a higher payout.”
The dairy giant’s next step will be to cap the Fair Value Share valuation at its current level of $4.52 during a transition to a new ‘restricted market’ approach from the current ‘freely traded’ approach. Fonterra estimates the new method could imply a discount of between 10% and 30% and the idea is to hold the price unchanged until the restricted valuation comes up to meet it. Step three will be to allow trading in shares among farmers, with Fonterra no longer obliged to issue or redeem shares with the ebb and flow of milk production. The ‘dry’ shares will get the same payout but won’t have voting rights. To create a sufficient pool of ‘dry’ shares, more will probably need to be issued.
Van der Heyden says the success of the changes will ultimately depend on how much additional capital farmers are prepared to commit though the board’s assessment is it may be enough to fund Fonterra’s needs for the next five years. Fonterra wants the changes to come quickly. Following consultation over the next two months, lifting the shareholder cap to 120% and imposing the new share valuation could be voted on Nov. 18 and implemented by 2011.
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