By Pattrick Smellie
The lobby for Fonterra farmer-shareholders has thrown its full weight behind the contentious Trading Among Farmers proposal after weeks of reports that dairy farmers have been going wobbly on their commitment to the scheme.
TAF will create non-voting tradeable units deriving dividends from the value-added part of the Fonterra business, creating an opportunity for farmers wanting to free up equity in the cooperative to do so and allowing private investors partial exposure to Fonterra’s fortunes.
The proposal is slowly wending towards implementation, with Fonterra announcing lead managers for the capital restructuring process yesterday, but farmer-shareholders have demonstrated extreme nervousness about the proposals in the past.
The cooperative’s 10,500-odd members are determined that they will be the only ones to hold voting rights, to ensure the world’s largest dairy exporter remains farmer-owned and controlled.
The issue of non-voting TAF securities has sparked significant international interest and misreporting, which has fuelled fears among farmers that the initiative is a stalking horse for a fully-fledged Fonterra float.
The Fonterra Shareholders’ Council issued a statement that it “remains fully supportive of the TAF process,” with a spokesman saying the timing was not prompted by any particular event, despite weeks of speculation that TAF continues to face hurdles with Fonterra dairy farmers.
“The Council’s position on the matter has remained consistent from the outset,” chairman Simon Couper said.
“The Council has supported TAF from its inception conditional on due diligence by the Board and the Council, the pre-conditions being met, and 100 percent ownership and 100 percent control being maintained by our farmer shareholders.
“The Council will continue to engage with the board and management in order to gain as clear an understanding of TAF as possible as we prepare to receive the four preconditions.”
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Fonterra Co-operative Limited has appointed financial services advisors to assist in preparing the Co-op for the launch of Trading Among Farmers in November.
Craigs Investment Partners was today confirmed as the Registered Volume Provider for the Fonterra Shareholders' Market.
Chief Financial Officer Jonathan Mason said the appointment of a well-known New Zealand organisation to this role represents another important Trading Among Farmers milestone.
"The Registered Volume Provider will be a market maker in the Fonterra Shareholders' Market, where farmer shareholders will be able to buy and sell among themselves.
"The role will include responsibility for creating a transparent market, and ensuring there are sufficient buy and sell orders aimed at creating market depth so that prices don't fluctuate unduly."
Deutsche Bank/Craigs Investment Partners, UBS, and Goldman Sachs were also confirmed as the "Joint Lead Managers" on Trading Among Farmers.
"The Joint Lead Managers will advise and assist in the development and launch of the Fonterra Shareholders' Fund. Initially, they will work to ensure the Co-op is ready to fulfil its corporate finance and financial reporting obligations under Trading Among Farmers.
"After July, they will also be responsible for building understanding among farmer shareholders and investors who want to buy units in the Fund," said Mr Mason.
The Board and Shareholders' Council meanwhile are continuing their due diligence process to ensure that the pre-conditions on which farmers voted can all be met and delivering on 100 per cent farmer control and ownership.
There is nothing new in the SCs stance. This is the crunch of the matter 'conditional on due diligence by the Board and the Council, the pre-conditions being met, and 100 percent ownership and 100 percent control being maintained by our farmer shareholders.'
The SCs stand against sections of the proposed legislation on DIRA has being interpreted by some as being SCs stand against TAF. They are two different things.
Assuming they can guarantee 100% ownership and control, the issue for TAF as proposed, is whether or not there will be enough shares offered for sale by farmers. This should not be taken for granted - especially over medium - long term. In the short term there will be some who will sell due to financial pressure.
My understanding is that 500m is required to maintain a liquid market for units. If that doesn't happen, my understanding is that the whole thing could be wound up. DIRA proposals refer to the 500m having to be met.
I wonder what back room deals have already being done with large offshore customers as to guaranteeing them units. At a meeting I attended it was stated, in answer to a question, that it couldn't be said that as a sweetener to get a deal, ability to purchase units, wouldn't be offered.
In answer to your last question - no I don't believe so.
I would like to know what happens if Craigs can't control volatility in the share price. Or perhaps more to the point, what measures will they use to ensure it doesn't happen? My understanding of that sort of thing is somewhat limited.
Thanks for your thoughts CO. The role and impact of the volume provider will be interesting, if TAF goes ahead. Will it's motive (Craigs..et al.) be aligned with strengthing Fonterras co-operative structure (balance sheet) or keeping the unit holders happy? This is an added dimension that will impact the business of milking cows (complicate, innovate, or dibilitate).
I've heard one repected central N.I supplier describe the shareholder fund as being B shares (A shares being those help by supplying shareholders), despite assurances of a firewall created by a) 'farmers trust' administor, and b) due diligence from the 'brightest legal and financial minds' (no mention of co-op experts); as security of shares surrended to fund must also be transfered to fund. Food for thought.
This same person also believes the most immediate threat to the continuation of a co-op is DIRA of which submissions close on the 24th of April. Fonterras silence on this matter is deafening. Govt insistence that shares be priced at FV or assumed opened market value, should a)TAF not go ahead and/or b) fund wound up be unit investors, ensures the co-operative structure is left dangling over a barrel.
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