Fonterra’s capital idea applauded by Fed Farmers

Media Release
18 September 2009

Fonterra’s capital idea applauded by Federated Farmers

Federated Farmers is heralding the first two stages of Fonterra’s capital structure review proposal, believing it provides a strong basis from which to grow the Cooperative while retaining full ownership and control by New Zealand’s farmers.

“On paper this seems to deliver the capital injection of a listing, without the downsides of losing farmer control and ownership,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“The capital structure review is all about setting a pathway to grow New Zealand’s largest cooperative and most important exporter. The proposals could see Fonterra’s capital base increase upwards of 20 percent.

“Farmers are not new to major investment decisions having built not just Fonterra but other businesses that provide the economy’s backbone. Listing was never going to be a magic bullet and at last, we have a proposal that plays to the strategic outlook of farmers.

“While we know many dairy farmers are struggling right now, there’s an equal number eager to take additional shares if the proposal receives the backing of 75 percent of members. 75 percent being the threshold needed for the first two stages to ‘pass go’.

“From both a shareholder and Fonterra perspective, there are powerful incentives to make this work.

“Shareholders looking to take advantage of proposed capital structure will look at the projected dividend of $0.55 per share - a 12 percent yield on a possible share price of $4.52. There’s always the possibility the share price could go up or down but the price will be held for this year.

“Fonterra’s fundamentals are sound and its debt levels are coming back within business parameters. On top of that, the outlook for global dairy commodities is very bright.

“For Fonterra, it incentivises shareholders to invest in the cooperative on the basis of dividend payout rather than straight production. While a work in progress, a clear and transparent milk price setting mechanism needs to provide the basis for profit transparency.

“We feel there will be demand from cooperative members to take advantage of the additional shares on offer. This in turn reduces redemption risk, which currently hangs like the sword of Damocles over Fonterra’s balance sheet.

“The big sea-change is the powerful incentive to grow Fonterra as a cooperative and not be put at the mercy of global fund managers.

“There have been many tweaks of capital instruments since Fonterra’s formation and while some might see this as another tweak, Federated Farmers will urge all of our members to get out to meetings in order to listen to the new proposals.

“Federated Farmers will now be taking independent advice on the proposal. The Federation also plans to work closely with the Shareholders Council, as it moves to undertake its analysis of the proposals and Fonterra’s performance.

“The Federation will also urge individual shareholders to take independent financial advice before they look to make any investment decision.

“I must say that the Directors have listened and must be congratulated for rightly putting our cooperative’s future in our hands,” Mr McKenzie concluded.

ENDS

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