By Allan Barber
The day when outside investors can apply for units in the Fonterra Shareholders Fund to be listed on the NZX and ASX has arrived at last.
Getting to this point has been a long and tortuous process during which Fonterra has consulted its members, finally gaining the required majority vote in favour of establishing Trading Among Farmers (TAF).
TAF will enable those Fonterra’s shareholders that wish to free up some capital to deposit shares in the fund, provided they retain enough shares to match their milk supply.
These shares can either be bought by other shareholders who would like to increase their shareholding or exchanged for the units with rights to dividends and share price value changes.
This process, the Fonterra Shareholders Market, will provide the liquidity for the units to be listed in the fund.
In the short term Fonterra will make up any shortfall in the Fund to bring it up to a maximum value of $500 million plus $25 million of oversubscriptions.
The key point about this whole exercise has been to ensure that shares can only ever be owned by members of the cooperative, not by outside investors who could threaten the principle of 100% ownership by dairy farmers. There remain critics of TAF and the establishment of the Fund, notably Lachlan McKenzie, previously chairman of Federated Farmers dairy section.
These critics maintain the principle of cooperative ownership no longer applies to Fonterra which has become a farmer-owned company. In a discussion with Bernard Hickey in June, McKenzie said the current generation of farmers would sell to the highest bidder, as has happened with Irish dairy company Kerry whose suppliers ended up as the lowest paid farmers in Ireland within a generation.
Fonterra chairman Sir Henry van der Heyden is adamant the integrity and security of the cooperative will be maintained even strengthened under TAF.
It will remove the redemption risk inherent in having to pay out farmers for reduced seasonal milk supply or when they leave the company, thereby stabilising the balance sheet.
The formation of Fonterra 10 years ago combined about 90% of the dairy industry under a single cooperative and it has been a very successful business, becoming the world’s single largest dairy exporter. At the same time there has been an impression Fonterra has underperformed when compared with global marketing giants like Nestle and Danone which have larger revenues and a bigger focus on milk based added value products.
Despite this Fonterra has succeeded in building a large branded business, as well as an extremely successful food ingredients business and, according to Rabobank, it is the fourth highest turnover dairy company in the world after three European companies, Nestle, Danone and Lactalis.
The security from the changed capital structure will enable Fonterra to pursue its global ambitions which include increasing the proportion of milk produced on overseas farms that it owns, notably in China where it has just announced two more dairy farms west of Beijing. It can also increasingly make selective processing investments, as it has in Sri Lanka where it processes local milk and produces yoghurt, and Chile.
As New Zealand’s biggest company, Fonterra inevitably attracts a lot of attention from many different groups: its farmer shareholders, the New Zealand public and government, and international competitors and customers. Now it will attract even more attention because of the investment status of the units.
None of this attention is necessarily unhealthy or unexpected, but there will be a great deal of interest in the behaviour of shareholders (will they trade as anticipated and how much trading will there be?), decisions by the board of directors (what balance will they decide to apply between milk payout and dividend and what will the share price be?) and company strategy.
Critics of TAF and the Shareholders Fund will be extremely sensitive to signals from the board. All hell will break loose if there is any suggestion that the external investors, through the mechanism of the units, have any influence on company strategy in general and the milk payout in particular.
Time will tell whether any of the fears expressed during the run up to TAF are in any way justified.
Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at firstname.lastname@example.org or read his blog here »