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Have your say: Fonterra abandons NZX listing option; will raise cash from farmers instead
Fonterra announced on Saturday that it had withdrawn the option of an NZX listing as part of its capital reform discussions with farmer shareholders.
"Many of our shareholders have made it clear they want to retain 100% farmer control and ownership of their Co-operative," Fonterra Chairman Henry van der Heyden said. Under Fonterra's constitution, 75% of votes must support any change to capital structure.
"Taking a public listing off the table is a pragmatic, commonsense approach which reflects how our shareholders feel. It would be a waste of time and money to debate the merits of a public share listing when there is no prospect of securing a 75% vote," Henry said.
"The Board, with the unanimous support of the Fonterra Shareholders' Council, will discuss with farmers possible solutions around a three-step process that, if accepted by farmers, would take care of Fonterra's capital structure issues for the immediate future. This is all designed to address redemption risk and to secure capital for the Co-operative.
"At present Fonterra's shares relate to milk production and are redeemable. This means at times of falling production, significant amounts of equity are lost from the balance sheet, affecting debt-to-equity ratios."
Fonterra said the consultation process with shareholders would begin on September 18.
Henry said that, if farmers supported the first three steps, there were a number of options not involving public listing that they could consider for any fourth step.
What I think
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New Zealanders generally don't trust the stock market anymore so it's understandable that farmers remain distrustful of an NZX listing, particularly given their punts on land prices in the last decade have proved so spectacularly profitable.
Fonterra has bowed to the inevitable and decided to push ahead because it is determined to find some form of structural reform that gives it access to new equity. Fonterra needs to reduce its own debt, probably by up to NZ$1 billion over the next couple of years to drag its debt to debt+equity ratio down under 50% from 53% currently. It also needs at some stage to fund some overseas growth in the consumer brands and fresh milk areas.
Fonterra's other risk is redemption risk. This is where a bad season could see farmers pull hundreds of millions of dollars of equity out of Fonterra because Fonterra's equity structure is based on farmers buying or selling an extra share for each extra/less kilogram of production every year. In the 2007/08 year of a big drought there was a net withdrawal of equity of NZ$600 million.
Fonterra could not afford another big drought or some form of longer term farmer exodus. This could be triggered by an aged farmer base retiring or by high debt levels and low milk prices encouraging others to sell out.
By choosing not to go with an NZX listing Fonterra has effectively decided it will ask its farmer shareholders for more equity. Most farmers will be able to afford it given their equity levels are high in farms that have more than doubled in value in the last 5 years. Some more recent entrants or those who have bought out neighbours with high debt levels may struggle. Fonterra estimates about 5% of its farmers who produce 10% of supply are stressed with high debt levels.
What this means is that farmers will simply borrow more from their banks and hand it over to Fonterra, who will then pay back some of its debt, sometimes to the same banks. Some of Fonterra's debt repayment will however be to overseas lenders. This will mean New Zealand Inc's net debt levels would increase and the banks' exposure to the dairy farming sector would expand at a time when the Reserve Bank of New Zealand is warning banks not to lend too much to farmers.
However, this simple act of asking farmers for more cash doesn't immediately solve the redemption risk. Fonterra may look at some sort of 'dry' shareholding option for farmers who hold 'excess' shares above their production amount or possibly retired farmers could own shares.
Your view? We welcome your comments and insight below.
I have never understood why
I have never understood why the dairy industry has not looked at the seafood industry model where fishing quota ( or catching rights ) can be leased on a year to year basis .
Why can't this apply to the dairy industry ---ie. the share owners lease their supply rights between themselves to even out production changes due to weather etc. This would involve less capital requirements by all and give the farmer suffering poor production levels abit of extra income for that year. It could also help retiring farmers and new young farmers --- the young farmer doesn't have front up with so much capital to start and the retiring farmer can use the shares as a form of "investment".
Does help Fonterra' redemption issue or am I missing something ?
<i>New Zealanders generally don’t trust
New Zealanders generally don't trust the stock market anymore .. That's real shame because the NZX is still a great investment. However times have changed, and in contrast to the past, investing today requires a more hands-on approach... The old buy-n-hold strategy is no longer the best strategy.
However with a small amount of research into the companies beforehand along with active management, stocks can outperform almost any other investment class by a long way.
What I think. 1. Fonterra
What I think.
1. Fonterra has worked out or been told that outside capital was not going to support anything Fonterra could reasonably offer. That only leaves current shareholders to find the capital needed. That process should have started 5 gradually years ago - now too much money is needed.
2. Fonterra has been dismissing redemption risk since 2006. They have been wrong. Now that it suits them Fonterra have done a complete U turn on the subject, but they are still misleading. DIRA gave Fonterra protection from redemption risk as you set it out. They have the option to issue capital notes instead of paying out shares, but capital notes pay interest.
3. Redemption risk is severe because Fonterra's shares are grossly overvalued - perhpas more than 5 times. At the end of January 2009 Fonterra had net tangible assets of 78 cents per share. The problem is that the share value is set at $4.52 - that is what the shares transact at this season.
4. The dairy industry has a debt problem - both on farm and with Fonterra. The debt is beyond what the industry can service - it has to either be reduced or repudiated. Shifting debt from Fonterra to its shareholders may appear a solution for Fonterra, but that is not an industry solution.
Who in their right mind
Who in their right mind would buy shares in Fonterrible! The only reason that this option has been withdrawn is that it would have failed due to a lack of investors.
Matt S, I agree that
Matt S,
I agree that buy and hold isn't necessarily the best strategy but doesn't "active management" of a share portfolio have the potential to cause tax headaches?
I've always been concerned that if I chop and change too much that i'll in effect be a trader rather than a long term investor for tax purposes hence liable for capital gains tax on any profits (I know its more complicated than that but that's my big picture understanding).
Have you read anything which provides a good summary of what you can and can't do? I know that Gareth Morgan in his latest book suggested that overly active management of a share portfolio can cause problems.
Too true marky mark. Easy
Too true marky mark. Easy to chase ones tail and end up on the IRD hook. Then again some nit in aus has just paid $57ooo for Jackson's glove. Wonder what that'll fetch in 10 years time. Maybe $570ooous!
marky mark. Your analysis of
marky mark. Your analysis of the taxation of share trading, versus tax free capital gains from long held investments, is correct.
Especially, when intention is so important, it is the same demonstration, as with our current land taxing provisions, of what a moronic tax system we have.
In the case of share trading, there is a currently an important tax case in process, regarding investing through an advisor, where the investor has a long term time frame, but hands over control to an advisor/broker who effectively trades: this was won by the IRD on the first round, won by the taxpayer on appeal, and is now under appeal by IRD again. This process takes a number of years, is bloody expensive for the poor sod taxpayer who is forced to fight it in the courts, and every other investor in the same position in the meantime has no way of telling what position to take when filing their tax returns (although, if the roll of the dice goes against them in final court, and our hopelessly vague and badly written legislation such as this has in many instances turned our tax system from what should be transparent - for an economy to thrive - into a casino instead, and like a casino, with the punitive penalty system we have, weighed firmly in favour of the house).
In such share and land transactions, there is often no way for a taxpayer to know with 'any' certainty, their position before the law. The binding rulings process is no real help, it's too slow, too expensive, and as the banks are finding out, not apparently adhered to by IRD anyway. And the court system will likely burn whatever savings you had before your 'number came up', effectively turning your savings into welfare cheques (including state servant wages) which is ironic, given the importance of savings.
And no, the answer is not full out capital gains taxes on property and share investments, it's to give Kiwi's the freedom of their own savings back, by not taxing them at all. Remembering the income used to make such investments has already presumably been taxed in the first instance. Removing tax on savings is the best way to remove distortion - not more and more taxation.
But in the meantime, we continue to be ruled by those who have not the backbone to make the big moves needed with our nonsense tax system to fix it, and give certainty to the taxpayer.
Dumb way to run a country.
/rant off.
Marky mark.. you raise a
Marky mark.. you raise a good point.. I'll have a hunt about and see what I can find. Also always good to speak with your accountant, so as always DYODD.
But yes, frequent trading (like trading all day every day) will likely attract CGT. It comes down to intent at the end of the day.
The intent behind 'active management' is still the same (intent) as buy-n-hold, but its also about managing risk and protecting your investment.
<i>frequent trading (like trading all
frequent trading (like trading all day every day) will likely attract CGT
It doesn't need to be as frequent as that to be caught Matt. Just a pattern of buying and selling will do it.
Farmers want to maintain control
Farmers want to maintain control over Fonterrible . What advantage accrues to them , to share it with mom & pop investors ? And given the parlous record of the NZ stock exchange since 1987 , what advantage do mom & pop get from dipping their toes into the piranha infested waters of " Weldonia ", again ?
For the farmers they get
For the farmers they get to have a milk processor/marketer that can access capital to grow their business and develop further.
Not saying Trev would invest, but there are others who would. Maybe Weldon could invest?
Farmers will never do it. If they did and the company made a profit that was not paid to them 100%, they would scream. Even if relinquishing control meant that their milk payments increased. It is the problem with the cooperative model, the processors/marketers cannot retain funds for investment because the suppliers want it all paid to them.
<i>Andy Rodgers Says: September 7th,
Andy Rodgers Says:
September 7th, 2009 at 12:01 pm
Who in their right mind would buy shares in Fonterrible! The only reason that this option has been withdrawn is that it would have failed due to a lack of investors.
It will be the exact people who are buying houses at the moment, as well as all those people who invested in their recent fund. I wouldn't be surprised if the gov/ aka us taxpayers, will need to bail them out in the not to distant future. Why don't they want to list on the stock exchange, simple, it is greed.
Greed, greed, greed... whenever someone
Greed, greed, greed... whenever someone wants a decent return on their investment they get called greedy, whether it's buying an investment property or investing in stocks.
Tell me Rob, what is the cutover point between a non-greedy just-trying-to-put-food-on-the-table-for-my-kids investor and a greedy investor ?
Thanks for the tax info
Thanks for the tax info guys. Hopefully one of the tax cases goes all the way to the supreme court and they can clarify things as much as possible.
Basing tax outcomes on subjective intention/purpose seems inherently problematic to me and is a sure fire way to test the limits of honesty in the most angelic of people.
Mark.. there are a couple
Mark.. there are a couple of good threads on the topic here:
http://www.sharetrader.co.nz/showthread.php?t=6220
http://www.sharetrader.co.nz/showthread.php?t=7064
http://www.sharetrader.co.nz/showthread.php?t=6758
Some more here:
http://www.sharetrader.co.nz/forumdisplay.php?f=22
http://www.guide2.co.nz/money/questions/tax/could-i-incur-capital-gains-...
Its been said before on this site, its not a level playing field out there.. the property investors have it easy when it comes to tax.. for now ;-)
But their returns are not as good !!
Its hard to fathom, the
Its hard to fathom, the realsector farmer can see the threat of much of profit from NZs productive land ending up in foreign hands, yet seem to still maintain a love affair with a National Party Executive that would sell their own mothers into sex slavery for personal profit if the market dictated offer was enticing enough.