Fonterra to outline possible capital structure changes on 7 April
Fonterra Co-operative Group Limited said today it would begin consulting with its farmer shareholders on a possible third step of capital structure change, ‘Trading Among Farmers’, on 7 April 2010.
Invitations were mailed today to Fonterra’s 10,500 farmer shareholders for a special television broadcast (on SKY digital channel 950) at 1.00 pm on Wednesday, 7 April 2010. A series of farmer meetings to discuss the suggested approach would then be held around the country the following week, 12-16 April.
The Fonterra Board and Shareholders’ Council have voted to support the concept of Trading Among Farmers and agreed that it should go out for consultation. Feedback from the consultation process will be taken into account before any final proposal is put before farmer shareholders for a vote. Any proposal would require 75 per cent support of farmer shareholders voting.
The approach of Trading Among Farmers would involve farmers buying or selling Fonterra shares among themselves, instead of purchasing or redeeming them through the Co-operative. It would ensure Fonterra remained 100 per cent farmer controlled and owned.
Fonterra Chairman, Sir Henry van der Heyden, said Fonterra had come through the recent global financial crisis in good shape. It was performing well and farmer shareholders were seeing solid returns, especially considering the extremely difficult and volatile economic conditions. Capital structure change was about making sure the Co-operative could continue to succeed, now and into the future.
Sir Henry said Trading Among Farmers was signalled as a possibility last year as another important step that would strengthen the Co-operative’s ability to provide the best returns for farmer shareholders in the coming years.
“It would get rid of redemption risk once and for all, protecting the Co-operative and ensuring it was better placed to grow farmer shareholders’ investment in Fonterra. It would stop money washing in and out of Fonterra and provide the Co-operative with a stable base of permanent share capital, which would give certainty about the level of capital, regardless of any changes in milk production in any season.
“In addition, we need to stop redemption risk penalising loyal Fonterra shareholders, who effectively have to fund the return of share capital to farmers who choose to leave the Co-operative,” Sir Henry said.
“Trading Among Farmers is also about more flexibility for our farmer shareholders. Among other things we need to find ways to make being part of the Co-operative more accessible – for new farmers wanting to join and for existing shareholders under pressure to sell shares to free up cash.”
Sir Henry said capital structure change was an opportunity for farmer shareholders to help secure Fonterra’s leading position in both New Zealand and the global marketplace, as a reliable partner to the world’s largest food companies.
“We have taken account of other capital structure models around the world, but we are developing an approach specifically for the unique circumstances of Fonterra. There is no co-operative anywhere in the world that is the same as Fonterra. We broke new ground with the formation of Fonterra and now we have an opportunity to refine that model and to break new ground again.”
THE THREE STEPS OF CAPITAL STRUCTURE CHANGE
The first two steps of capital structure change received almost 90 per cent support from farmer shareholders voting at the Annual Meeting in November 2009.
Step One, ‘Strengthening the Share Structure’, gave farmers greater flexibility in the number of shares they can own, up to 120 per cent of their current or expected production. As a financial incentive for farmers to hold a buffer of “dry” shares in excess of production, Fonterra pays a competitive Milk Price and now distributes any profits (after retentions) as a dividend based on shares held, rather than milksolids produced.
Step Two, ‘Restricted Share Value’, involved changing the way Fonterra shares are valued to recognise the market is restricted to Fonterra farmer shareholders only. A transitional share price was put in place until the valuation on a restricted market basis catches up.
Under the approach being discussed for Step Three, ‘Trading Among Farmers’, the obligation of Fonterra to redeem shares would end and instead, farmers would trade shares among themselves. This would eliminate redemption risk and provide Fonterra with a permanent share capital base - giving certainty about the level of capital, regardless of any changes in milk production in any season.