Fonterra is mulling buying back the NZX-listed Fonterra Shareholders Fund as it launches a round of consultation on capital restructure proposals.
In the meantime the co-op has suspended trading of shares by farmers into the shareholders fund and put a "temporary cap" on the fund - a move that will likely come as a big surprise.
The Fonterra board says it has "reached a preliminary view" that having no fund would be its preference.
However, a buyout of the fund would require a 75% vote in favour - so presumably the price would have to be right for shareholders of the fund units, who include outside, non-farmer investors.
But Fonterra was indicating on Thursday it wasn't prepared to buy out the fund at any price.
"If we cannot reach an acceptable arrangement to buy back the Fund that 75% of voting unit holders support, then a Capped Fund would also work. In other words, we would only seek to remove the Fund at a reasonable price that was acceptable to unit holders, fair to farmer owners and made sense to the Co-op compared to the Capped Fund alternative," the board said.
Consultation is going to run for some time, with decisions not likely to be made till November.
Closing the door
While no decisions have been made, it appears the giant dairy co-operative is moving towards closing the door on any non-farmer investment in the co-operative.
Outside investment in Fonterra has long been opposed by farmers.
Earlier the co-op had conducted a survey of its farmers which gingerly raised the subject of outside investment in the co-op - and the farmers gave this a vigorous thumbs down.
The Fonterra Shareholders Fund (FSF) is a mechanism through which farmers may trade their shares in the co-operative.
The FSF units are traded on the NZX and are open to investment from outsiders - but the units confer no power on the co-operative and are simply a means of sharing in the performance of the co-op through the receipt of dividends - if dividends are being paid.
Fonterra on Thursday said to allow its farmers to have "open conversations" and consider all options during consultation, the co-operative was temporarily capping the size of the shareholders fund by suspending shares in the Fonterra Shareholders’ Market from being exchanged into units in the fund.
At the moment Fonterra is in a trading halt on the NZX, which is to be lifted on Friday.
The temporary cap on the fund will be effective once the current trading halt is lifted when the market opens on Friday and will remain throughout the consultation process.
Fonterra chairman Peter McBride said if the temporary cap was not in place, anyone holding ‘dry shares’ – those shares held in excess of the ‘wet share’ requirement linked to milk production – would have been able to exchange them into units in the Fund during consultation.
"This could have more than doubled the size of the Fund and made the option of buying it back unaffordable in the context of the co-operative’s current balance sheet targets."
The options for consideration by farmer shareholders for the capital restructure are included in a consultation booklet.
However, McBride said the board has put forward a preferred option – a “Reduced Share Standard with either No Fund or a Capped Fund.”
“We believe the best option for our co-op is to move to a structure that reduces the number of shares a farmer would be required to have and either removes the Fund or caps it from growing further, to protect farmer ownership and control,” he said.
Under this option, the minimum requirement for farmer owners would be one share for every four kilograms of milk solids supplied to the co-op, compared with the current requirement of one share for every single kgMS supplied. At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply. But farmers will be encouraged to share their views on these and other features.
"This would make it easier for new farmers to join the co-op and give more flexibility to existing farmers who may want to free up capital or who are working through succession," McBride said.
"A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market."
McBride said the changes "could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in the market".
"Ultimately the price for farmers’ shares would be determined by the performance of the Co-op and trading between farmers.
'A more sustainable proposition'
“We believe this is a more sustainable proposition over the longer term than the alternatives we are confronted with."
McBride said that this was the board’s "current thinking", but it was open minded about adjusting that direction based on farmer feedback on any of the options.
Other options examined in the consultation document include:
- dual share structures, which would move from the current single co-operative share to a compulsory supply share and a separate non-compulsory investment share
- unshared supply structures
- a traditional nominal share structure
- a split co-operative model
McBride said over the coming months, the co-operative’s farmers will have the chance to share their views through a series of meetings, webinars and other opportunities – and if the appetite for change remains – the board will do further work to refine the preferred option or options and have a second round of consultation. If the Board decides to seek change to the Co-operative’s capital structure, it would likely aim for a farmer vote around the time of the Annual Meeting in November and the approval of 75% of votes from voting farmers would be required.
If the preferred outcome is to buy back the Fund, it would also require the approval of 75% of votes from voting unit holders.
'Raising additional capital is not the purpose of this review'
The consultation document says having adequate and sustainable access to capital to fund the co-op's strategy is always front of mind, "and raising additional capital is not the purpose of this review".
"We will fund our strategy through a strong balance sheet, cashflow, and through leveraging our IP and innovation capability to partner in new products and categories where it makes sense.
"This capital structure review is about prioritising New Zealand milk, protecting farmer ownership and supporting a sustainable milk supply over the longer term.
"Our strategy is dynamic, and we will always be reviewing our portfolio – asking ourselves what each asset is worth to us now and into the future. We will continue to turnaround key parts of our portfolio and divest non-core businesses to support new investments as necessary.
"Our focus is on maintaining a strong balance sheet to support growth."