Fonterra gives in over public listing

Henry van der Heyden. Photo / Paul Estcourt

Fonterra has ruled out a public listing of its shares as part of its proposed capital restructure.

Chairman Sir Henry van der Heyden told the Weekend Herald the board of New Zealand's biggest company had taken public listing off the agenda.

The announcement, made by Sir Henry in an email to the co-operative's 7000-odd farmer-owners yesterday, will disappoint the sharemarket but delight farmers who feared loss of control and ownership as Fonterra leaders seek to protect the balance sheet from share redemption risk and raise more equity to advance a global growth strategy.

Mark Weldon, chief executive of stock exchange operator NZX, said the market would be disappointed.

"Fonterra is such a distinctive company and in a critical space for New Zealand that any chance for mum-and-dad investors and professional investors to invest in it would be hugely welcome."

Van der Heyden said details of a three-stage capital reform proposal would be made public on September 18.

The proposal, which will require a 75 per cent vote of support from farmers at each stage, would address Fonterra's capital issues for the foreseeable future, he said. He would not elaborate.

"Fonterra will remain 100 per cent controlled and owned by farmers."

With a public share listing off the table, Fonterra could propose raising equity by offering farmers the opportunity to buy "dry" shares in addition to the "wet" share they must buy for every kilogram of milksolids supplied. Van der Heyden would not comment on the possibility.

Fonterra Shareholders Council chairman Blue Read said van der Heyden's announcement would be a huge relief to dairy farmers.

The council, a watchdog of farmer interests in the world's biggest dairy exporter, has been negotiating with the Fonterra board for months to reach agreement on a capital reform package to present to shareholders.

It will be the second attempt at restructure. In the face of farmer outrage, directors and the council had to abandon a 2007 proposal which involved creating an investment company outside the co-operative with publicly listed shares.

Van der Heyden said directors had in very general terms considered another tilt at a public share listing, but it would have been a waste of time and money. The decision to drop the option had been practical, pragmatic and common sense.

"It reflects what farmers feel today. We need 75 per cent support and in all the dialogue with farmers, the majority made it clear they wanted 100 per cent control and ownership. There was no chance of us getting 75 per cent.

"Payout is a lot more important to them than value."

Fonterra, which receives and controls 92 per cent of the country's raw milk supply and is responsible for 27 per cent of its export returns, makes a pooled, seasonal payout to its suppliers which includes a payment for raw milk and a dividend for value-added product sales.

A share listing would likely have raised more equity than farmers can contribute for investment in Fonterra's pursuit of value-added overseas opportunities in ingredients and brands markets.

Fonterra, with revenues last year of $19 billion, was created from a huge industry merger in 2001. One of its founding principles was to grow value-add returns ahead of commodity earnings. Eight years on, that goal is still proving elusive.

Just 31c/kg of last year's bumper $7.90/kg payout was from value-add sales.

Payout has since slumped as a result of global recession and during the long capital restructure negotiations there have been a growing number of farmer calls for Fonterra to stick to its commodity export knitting and focus on getting the best farmgate price for raw milk.