Fonterra passes first test

By Claire Trevett, Owen Hembry

Fonterra's bold plan to list on the stock exchange in 2010 received a positive response from farmers and the Government yesterday despite a warning that it adds risk to the business.

Based on its present fair-value share price - set in an independent review each year - a listed Fonterra would be worth about $8.6 billion.

That would make it the biggest company on the stock exchange, although with only 35 per cent of its shares available to be bought and sold it would rank below the likes of Telecom and Fletcher Building on the top 50 index.

Fonterra is already the world's fifth-biggest dairy company by revenue.

Chairman Henry van der Heyden said the decision facing farmers was bigger than the move to form Fonterra in 2000. "We have the potential to become a truly global dairy company, a huge asset for New Zealand and a national icon."

Farmers at meetings in Hamilton and Christchurch were largely positive about the plans recommended by the dairy giant, although they expect vigorous debate before a final vote on listing in two years.

A 75 per cent majority of Fonterra's farmers will have to vote in favour for the listing to proceed.

Under the plan, all Fonterra's business operations, assets and liabilities would be split from the farmer co-operative and listed on the stock exchange.

The Standard & Poor's rating agency has warned that Fonterra's credit rating could be downgraded if the listing goes ahead.

But Fonterra now has a strong A+ rating, and any re-rating would be unlikely to affect investor enthusiasm for the company.

Finance Minister Michael Cullen said the Government's primary concern had been the national interest.

"That included ensuring that New Zealand retains majority ownership, that the farmers' co-operative retains effective control, that the headquarters remains in New Zealand and the primary listing remains in New Zealand."

Fonterra has said it will bar any shareholder other than the farmer co-operative from holding more than 10 per cent of the shares.

The Government has said it will back the legislation required to make the float happen if farmers support it.

Dr Cullen said Fonterra's co-operative structure and New Zealand-based operation made it difficult for it to finance its expansion through debt, and it was not able to obtain the capital it needed for expansion plans.

Mr van der Heyden told farmer meetings yesterday via a video link from Christchurch that several capital structure options had been considered, but the preferred choice best dealt with the goals of the restructuring.

"What we are proposing is a significant evolution, not tinkering at the edges."

But yesterday was only the first day of a two-year consultation process, during which farmers would vote twice.

The first vote, probably around May, would be to approve a change to the two-entity structure and introduce a more transparent milk-price system.

The second vote, expected to be in about 2010, would decide whether Fonterra would list and introduce external capital - making the earliest date for any listing mid-2010.

"If we go through a very good, robust consultation process, taking the farmers with us, take their feedback, the likelihood that we don't come out the other end with a positive vote is very, very small," Mr van der Heyden said.

Protection for farmers would be written into Fonterra's constitution, making it impossible for any other entity to take control of Fonterra.

The co-operative and the new company would have separate boards, with some common farmer-directors.

The chairman would be the same for both and the co-operative would control appointments to the Fonterra board because of its majority shareholding.

The strategy also had five conditions that Fonterra had to meet before the second vote - a competitive milk price, superior business performance, acceptable share market conditions, acceptable listing value for current shareholders and legislation to support any change.

Floating Fonterra

The plan

* A new company will own the assets, liabilities and operations of the existing co-operative.

* The co-op will retain a 65 per cent stake, 15 per cent will go to farmers and 20 per cent will be publicly held.

The process

* A vote in May to change the current structure to two entities.

* A vote in 2010 to decide on listing and external investors.

The protection

* Only the co-op will be allowed to own more than 10 per cent of shares.

* 50.1 per cent of shares must be held by NZers.

* The co-op will not be able to own less than 50.1 per cent without 75 per cent vote.

* Minimum co-op stake will be 35 per cent.

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