Fonterra's Board of Directors announced today that the estimated Fair Value Share price for the 2010/2011 season is $4.52. This is the Base Price set out in the changes approved by shareholders at last month's annual meeting and is also the price prevailing for the current 2009/2010 season. As required under changes to the Co-operative's Constitution approved at the annual meeting, the Independent Valuer, Grant Samuel, provided the Board with two valuation ranges: a Fair Value Range reflecting the unrestricted market value of Fonterra shares, and a discounted Restricted Market Value Range reflecting that ownership of shares is restricted to Fonterra farmers only. The Valuer has estimated a Fair Value Range with a mid-point of $5.10 and a Restricted Market Value Range with a mid-point of $3.83. The Fair Value Range midpoint represents a 13 per cent increase over the current season's $4.52 price. But as Fonterra is now transitioning to a Restricted Market Value approach, the share price is being effectively held at the Base Price until the Restricted Market Value exceeds this level. Fonterra Chairman Sir Henry van der Heyden said the increase in the Fair Value Range since the previous valuation in May 2009 primarily reflected an increase in the value of Fonterra's consumer brands businesses and international ingredients businesses, consistent with stronger global equity markets. However, this positive impact was partly offset by a lower valuation for the Commodities & Ingredients business segment. This reflected the impact of the new basis for setting Fonterra's Milk Price on the long term margins of our commodity business. The Restricted Market Value Range represents a discount to the Fair Value Range of 25 per cent, being the midpoint of the Valuer's assessment of a discount range of 20 to 30 per cent. Sir Henry said the Valuer had noted that it was difficult to estimate at this stage an appropriate discount level with a meaningful degree of precision. A key factor was that arrangements have not yet been finalised for Trading Among Farmers, which is suggested as the next step of Capital Structure change. The details of Trading Among Farmers would potentially have an influence on the estimated discount level and the Valuer had signalled that it may reconsider the discount level as and when more details are known. Grant Samuel was appointed by the Fonterra Shareholders' Council as Independent Valuer in September 2009. It has confirmed in its report that it has adopted the same valuation method as the previous Valuer, Duff & Phelps. The enterprise value was estimated through the application of two conventional valuation methodologies: a discounted cash flow analysis, and a market multiple analysis that benchmarks Fonterra against prevailing share prices for selected comparable companies operating in the international food sector. Dividend Policy and Guidance on Retentions The Fonterra Board has announced its approach to retentions for the current season and its dividend policy for future financial years. Sir Henry said farmers had traditionally tended to focus on the overall payout from Fonterra, rather than the separate components of Milk Price and Value Return (Distributable Profit). However, following capital structure changes approved at November's annual meeting, it would be important for farmers to more clearly distinguish between the price for milk they supply to Fonterra, Fonterra's Distributable Profit, and the dividend paid on shares. During consultation on the capital structure changes, the Board said it would look more at retentions as a way of keeping funds within Fonterra and strengthening the balance sheet. The Board was conscious of the need to strike the right balance in any given season between retentions and payments to farmers, taking account of the financial positions of both farmers and the Co-operative, Sir Henry said. At its meeting this week, the Board approved a dividend policy, which has now been announced. Subject to the full discretion of the Board on the dividend level in any year, from 2010/2011, Fonterra will target a dividend payment ratio of 65-75 per cent of Distributable Profit (payable in two instalments, in April and October). This would mean 25-35 per cent of Distributable Profit being retained. The dividend in any year will also take into account: any non-recurring items that affect Distributable Profit; average dividends paid over the previous three years; short-term earnings projections, investment priorities and gearing targets; and any other factors the Board considers relevant including the level of milk payments to farmers and other existing or likely market conditions that may impact Fonterra or its shareholders. For the current 2009/2010 year, the Board is forecasting Distributable Profit of between 35-45 cents per share, including non-recurring items (such as gains on the recent sale of Fonterra's stake in the UK joint venture with Arla). The Board is targeting a dividend of between 20-30 cents per share. Dividend guidance within this range translates to an annualised return of 7-10% based on an issue price of $4.52 per share paid in February 2010 and dividends paid in April and October 2010 in accordance with Fonterra's dividend policy. However, shares acquired in the transition period must be held until 31 May 2011. Dividends in the 2010-11 financial year, and the share price at the end of that year, are at this point uncertain and Fonterra will provide further guidance next year. Fonterra will no longer issue a specific forecast number for a dividend (as it used to do with the Value Return), but will instead provide farmers with guidance within a range on the likely level of Distributable Profit and guidance within a range on the likely level of dividend. This will assist farmers in planning their business cash flows and in making decisions about investing in additional "dry" shares. Under Capital Structure changes approved at last month's annual meeting, Fonterra farmer shareholders have the opportunity to own shares up to 120 per cent of their current or expected milk production for the season. Farmers will have their first opportunity to invest in dry shares over the next few weeks, with share application forms being mailed to shareholders in the next few days. All shares issued during this transition period will be eligible for full dividend payments for the 2009/2010 financial year.