Fonterra asks farmers for cash

Henry van der Heyden is confident farmers want something like the solution offered. Photo / Paul Estcourt

Farmer owners of the country's biggest company, Fonterra, have had their bluff called on raising money for their capital-starved co-operative - they've been asked to come up with the cash they forbid directors to go to the sharemarket for.

Fonterra leaders yesterday unveiled a long-awaited capital restructure proposal and the package offers no prospect of a market listing. But it does suggest a move to share trading among farmers, instead of share transactions through the co-operative.

A three-step proposal, supported by the Fonterra Shareholders Council but subject to an 80-meeting nationwide consultation with farmers, suggests:

Step 1: Inviting suppliers to buy shares for up to 120 per cent of their recent or expected milk production. The current share standard is for 100 per cent, the extra 20 per cent would be in "dry" non-milk shares.

Step 2: Getting Fonterra's market-valued shares revalued in recognition they are now restricted - but the share value will be temporarily frozen at the current $4.52 until the revaluation reaches that level.

Step 3: Moving to share trading between farmers. This would address the vulnerability of Fonterra's balance sheet to share redemption risk - hundreds of millions of dollars flow in and out of the co-operative annually because shares are linked to milk production.

Each stage will require a 75 per cent vote of support from shareholders. Steps 1 and 2 could be put to the vote at Fonterra's annual meeting in November. Step 3, share trading between farmers, will not be put to a shareholder litmus test until next year.

Fonterra chairman Sir Henry van der Heyden said it was impossible to know how much equity might be raised by step 1.

But he noted Fonterra's 10,500 suppliers had just two months ago bought $550 million of milk production shares - the biggest capital raising in the country this year and when dairying's chips were down.

Fonterra, which had revenues last year of $19.5 billion, had not modelled how much capital could be raised from farmers each year, and had not taken independent expert advice, he said.

But directors had a "high degree of confidence" farmers would adopt the proposal, which should meet Fonterra's equity needs for the next five years.

He based this confidence on the word of farmers themselves. Not only had they rejected a 2007 capital restructure proposal which involved a partial listing of Fonterra shares, saying they wanted to retain 100 per cent control and ownership of the co-operative, but when Fonterra went to the share market with a $300 million senior retail fixed bonds offer this year, farmers questioned why they had not been approached first, van der Heyden said.

Shareholders council chairman Blue Read said he was confident the proposal was "very acceptable to farmers". But the council was "very comfortable" if the reform consultation timetable ran beyond the November annual meeting.

Read said 10 per cent of Fonterra shareholders would have "no chance" of buying extra shares and 20-30 per cent would find it a struggle given their tight cashflows. However many farmers were in a strong financial position and would welcome the opportunity. The council wants to give farmers time to digest and debate the proposal, but the tone of the proposal documents suggests urgency.

"Over recent seasons some shortcomings in the current capital have become more obvious, which could put the co-operative at risk and could be seen as unfair to some farmer shareholders. Ideally we should start addressing these shortcomings from this season to protect the co-operative," says the document to shareholders.

Fonterra's capital structure and associated problems evolve from the two big co-operatives that merged to create it in 2001. Under co-operative rules, shares are linked to milk production. If milk production falls, as it did because of the 2007-08 drought, Fonterra has to stump up money to redeem shares.

Last year it had to write a $600 million cheque to its farmers to buy back unutilised milk shares. The co-operative, heading for another redemption shock to its balance sheet this season because of low payout, said it could not operate a global business under these circumstances.

An aggravating factor is that as a co-operative, Fonterra must pay out most of its operating revenue to its farmers each year, though last year it retained $300 million to protect its balance sheet.

Van der Heyden said there was no appetite among directors to increase retentions. However the capital restructure strategy documents include "sensible" retention levels and sales of non-strategic assets.

Fonterra also seeks more capital to fund business growth opportunities using domestic and overseas resources.

SHAKE-UP

The problems: Fonterra needs capital. Shares are redeemable making balance sheet vulnerable. Debt levels up $2 billion last year.

The solution: Ask farmers for more capital via the issue of extra shares. Change timing of share buying/redemption. Extend dividend returns to "dry" non-milk linked shares. Link dividends to investment, not milk production.