Dairy giant tweaks capital plan in drive to grow milk production, providing more time to share up for farmers who commit to raising output

Content supplied by Fonterra:

Fonterra announced today a five-point plan to give farmer shareholders more flexibility in managing their farm businesses in order to support and grow milk production to support the Co-operative’s growth strategy.

The plan includes:

1.    A bonus issue of one additional share or unit for every 40 held on 12 April 2013.

2.    A further Supply Offer enabling Fonterra shareholders to sell the economic rights of some of their shares into the Fonterra Shareholders’ Fund¹.

3.    A Dividend Reinvestment plan enabling shareholders and unit holders to elect to receive dividends in the form of shares or units.

4.    Flexible contracts to give new and growing farmers more time and options to fully back their milk production with Fonterra shares.

5.    New opportunities for winter milk supply contracts in the upper North Island to fuel Fonterra’s new UHT plant at Waitoa.

Fonterra Chairman John Wilson said Fonterra was committed to providing flexibility for its farmers to help them manage their shareholdings: “Milk is the life blood of the Co-operative.

“For Fonterra to grow, we need our farmers to grow. With a stable capital base, we now have certainty and can offer farmers more ways to grow milk supply and give them more time to share up.”

The bonus issue will automatically provide all shareholders and unit holders with free additional shares and units on April 24.  Each shareholder and unit holder will receive one bonus share or unit for every 40 shares or units held on April 12.

“The bonus issue means our farmer shareholders can use these extra shares to back current or future production increases.  Alternatively, they might decide to hold them as an investment or sell them,” said Mr Wilson.

“Based on current production levels, the bonus issue means around 95 per cent of farmer shareholders will not need to buy additional shares next season to match any increase in production,” said Mr Wilson.

Mr Wilson said Fonterra’s guiding principle was that milk production should be backed by share ownership.  With Trading Among Farmers providing a more secure capital base, Fonterra was able to offer more flexible options for farmers to achieve full share ownership.

Accordingly, the Co-operative had modified its growth contracts to provide more time and options for growing farmers to buy shares to match their production, with changes including:

·         A new flexi contract linked to Fonterra’s Farmgate Milk Price would require farmers to purchase 50 per cent of shares up front for growth milk but they would only be required to purchase their remaining shares when the Farmgate Milk Price was above a certain threshold.

·         A modified growth contract that would allow farmers to purchase a minimum 10 per cent of shares up front for growth milk.  Farmers would not have to purchase further shares until the fourth season.  After that, they would be given more time to share up provided they made a specified minimum annual investment.

These contracts would be available to new and current farmer shareholders who are growing.

Additionally, there would be new opportunities for winter milk contracts for Fonterra farmers in the upper North Island following Fonterra’s decision to invest more than $100 million in a new UHT plant at Waitoa, in the Waikato.  The new plant would increase UHT capacity by 100%, meeting demand for UHT products from China.

“To fuel this growth, we will need to increase our winter milk supply in the upper North Island by over 50 per cent for the 2015 season,” Mr Wilson said.  “This represents an opportunity for the many farmers who have signalled an interest in supplying winter milk.”

Chief Executive Theo Spierings said growing milk volumes was fundamental to Fonterra’s growth strategy.

“The steps announced today were planned before the launch of the Shareholders’ Market and Fonterra Shareholders’ Fund, and were referred to in the Offer Documents.  Now is the right time to implement them.

“The initiatives will benefit our existing farmer shareholders, make life easier for those expanding production, and encourage new entrants to join the Co-operative.

“Unit holders who have chosen to invest in Fonterra’s continuing performance will also benefit – not only through the bonus issue but also the effort we are making to keep driving forward on our business strategy,” said Mr Spierings.

Fonterra will have 2.5% more shares on issue after the bonus issue and the bonus issue will not affect Fonterra’s total earnings or dividends paid.  Since everyone receives more shares in the same proportion, no person will be better or worse off, although the earnings per share, and dividend per share will reduce proportionately.

Mr Wilson confirmed that Fonterra intended to conduct another Supply Offer after the interim result, as indicated in the Fund Prospectus.  Details would be provided after the co-operative’s interim result announcement next month.

The Board intends to introduce a Dividend Reinvestment Plan later this year, offering farmer shareholders and unit holders the opportunity to elect to receive dividends in the form of shares or units.

¹ Fonterra will purchase all the units issued from the share sales in a way that does not increase the number of units on issue.

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BACKGROUND

Bonus Issue

The bonus issue will ensure that there are sufficient shares on issue above minimum shareholding requirements at the end of the 2013/14 season.  It will also contribute to ongoing liquidity in the Fonterra Shareholders’ Market and the Fonterra Shareholders’ Fund.

The bonus issue details are as follows:

•       All shareholders (and unit holders) will receive one share (or unit) for every 40 held on 12 April (referred to as the ‘record date’).

•       This means that a shareholder with 100,000 shares on 12 April will receive an additional 2,500 shares (likewise for units and a unit holder).

•       All shareholders and unit holders will therefore receive 2.5% more shares/units, and Fonterra will have 2.5% more shares on issue after the bonus issue.

•       The bonus issue will not affect Fonterra’s total earnings or dividends paid.

•       Since everyone receives more shares in the same proportion, no person is made better or worse off although the earnings per share, and dividend per share will reduce proportionately.

•       Additional shares or units are “free” and have no tax implications.

•       No action by farmers or unit holders is required to receive the additional shares or units

•       The shares (or units) that result from the bonus issue will be received by shareholders (or unit holders) on 24 April.

•       The share standard is unchanged - farmers can keep their bonus shares (e.g. to back production) or sell them.

Supply Offer

After the interim result announcement at the end of March, Fonterra intends to provide farmers the opportunity to offer the economic rights of “Wet” (production-backed) shares to the Fund, similar to the Supply Offer held last November.

Fonterra will purchase all the units issued from the share sales in a way that does not increase the number of units on issue.

Further detail will be provided when the interim result is announced on March 27.

Dividend Reinvestment Plan

The Board plans to introduce a Dividend Reinvestment Plan in October – when the final confirmed dividend is paid.

Farmers and unit holders will be able to elect to receive dividends in the form of shares or units.

The aim is to provide farmers a further flexible pathway to obtaining shares to back production.  A Dividend Reinvestment Plan will give farmers the ability to reinvest dividends in shares and pay for them with the net proceeds of dividends, if they want to.

Further details will be provided from mid-year.