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Valuation Of Fonterra Fair Value Shares

Estimated Valuation Of Fonterra Fair Value Shares

Fonterra Co-operative Group Ltd has set its estimated fair value share price for the 2003/04 season at $3.95. This is a small increase on the current price, for the 2002/03 season, of $3.85.

Fonterra's Board of Directors chose the price from within the fair value range provided by independent valuer Standard & Poor's Corporate Value Consulting, as mandated under Fonterra's constitution and the Dairy Industry Restructuring Act.

Standard & Poor's valuation has also been subject to peer review by PricewaterhouseCoopers.

Fonterra Chairman Henry van der Heyden said Standard & Poor's slightly improved valuation from May reflects the success of Fonterra's business strategy in the face of a difficult international environment. It also reflects the independent valuer's confidence in Fonterra's ability to deliver good returns for shareholders in the future.

"This is a positive outcome for Fonterra and its shareholders. It indicates our business strategy has served us well through a testing time on world markets."

The board has chosen $3.95 as the estimated fair value share price for the new season, lower than the range's midpoint of $3.99 advised by Standard & Poor's.

This is an estimated price only. The final share price must be set before June 1, the start of the dairy season when most dairy farm and herd transactions occur.

The estimated price represents a 10 cent increase on the fair value share price confirmed in May for the 2003/04 season. Mr van der Heyden said the latest Standard & Poor's report identified a range of factors that had a positive impact on the value of Fonterra's business. These included the continued capture of merger benefits, synergies from the reorganisation of the Group's Australian investments, the gains from joint ventures and new products, and the continued successes of value-added activities.

Standard & Poor's noted that these factors had offset external factors which would detract from the value of the business, such as the appreciation of the New Zealand dollar against the US dollar and a deterioration in the global economy.

Mr van der Heyden said Fonterra's management had made good progress on capturing $310 million of merger benefits over three years.

"Standard & Poor's scorecard indicates that we will have banked - or are on-track to achieve - $193 million in merger benefits by the end of year 2 of the merger," Mr van der Heyden said.

Background to the Fair Value Share Process

Before the creation of Fonterra in October last year, shares in dairy companies had static nominal values. Fair value shares were introduced under the Dairy Industry Restructuring Act and Fonterra's Constitution to more accurately reflect farmers' investments in their company.

Farmers are required to hold one fair value share for each kilogram of milksolids they supply Fonterra.

Fonterra's Board of Directors sets the price from within a valuation range provided by Standard & Poor's, the independent valuer chosen for the job by Fonterra's Shareholders' Council.

The final share price must be set before June 1, the start of the dairy season when most dairy farm and herd transactions occur.

However, to assist farmers in planning production levels and budgets for the season ahead, Fonterra is required to provide shareholders with an estimate of the share price by December 15.

The benefits of providing this estimated price is that prospective shareholders, and existing shareholders who plan to increase production for the new season, have the option of setting a purchase price range of plus or minus 7.5% of the most current estimate of the share price. Usually this will be the December 15 estimate, unless in the Board's opinion circumstances arise which would result in a further estimate that was substantially different from the estimate most recently provided.

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