KEY POINTS:
Fonterra chairman Henry van der Heyden and his fellow directors deserve a huge bouquet for their bold and forward-looking restructuring proposal.
Their proposition will give Fonterra the opportunity to become a world class company and create considerable wealth for dairy farmers. It will also give domestic investors an opportunity to obtain a meaningful exposure to the country's rural sector.
The proposed restructuring is based on Ireland's highly successful Kerry Group, which introduced the same model 21 years ago. Most of the issues raised during the Kerry Group's Irish Stock Exchange listing will be debated, and voted on, by Fonterra Co-operative shareholders over the next few years.
If Fonterra shareholders support the approach proposed by directors it should be a win-win-win situation for dairy farmers, the New Zealand economy and domestic investors.
Kerry Co-operative Creameries, which began trading in January 1974, was the smallest of Ireland's six major agriculture co-operatives with annual sales of just $56 million.
In the late 1970s and early 1980s the co-operative developed a growth plan that was based on the formula, strategy x capability x capital = sustainable profitable growth. The organisation had the first two ingredients but like most co-operatives, including Fonterra, it had limited capital-raising capabilities.
Kerry's young and aggressive management team undertook an extensive investigation of funding options and came to the conclusion that a partial sharemarket float was the only practical alternative.
But Kerry, which is in the south-west of the country, is the traditional home of Irish nationalism and farmers in the area had little time for investment bankers from Dublin and didn't want to lose control to foreign interests.
Their immediate response to a sharemarket float was negative and very similar to the attitudes adopted by the Green Party and New Zealand First this week.
But Kerry directors were convinced that the organisation had no option but to grow and, if this was financed through borrowings, control would be lost to lenders.
They believed it would be better to have a strong company with some outside shareholders than a 100 per cent farmer-owned co-operative that was up to its neck in debt. The directors emphasised this issue because they knew that farmers appreciated the burden of excessive debt more than any other business group.
The plan was approved at a special general meeting of Kerry shareholders in February 1986 and a prospectus was issued later that year.
The Fonterra proposal is remarkably similar to the Kerry restructuring in a number of areas:
* Fonterra will transfer all its assets, liabilities and operations to the listed entity just as Kerry Co-operative transferred all its assets, liabilities and operations to the listed Kerry Group.
* Farmers will remain shareholders in Fonterra Co-operative and the latter will own 65 per cent of the NZX listed company. Kerry Co-operative originally owned 80 per cent of Kerry Group.
* Dairy farmers can purchase 15 per cent of the listed Fonterra in their own name whereas dairy farmers in Kerry purchased 11 per cent of the newly listed company in 1986.
* Outside investors will be offered 20 per cent of Fonterra compared with 11 per cent of Kerry Group.
One of the big topics of discussion in Ireland was the issue price of shares to dairy farmers and the public.
Many farmers believed it was their company and they shouldn't have to pay for shares held in their own name but directors argued that free shares are not fully appreciated.
It was determined that dairy farmers would pay 35p per share and the investing public 52p.
Many institutions didn't participate in the Initial Public Offering (IPO) because they feared that farmer shareholders would depress the share price as they rushed to take quick stag profits. But the farmer issue was oversubscribed, the individual farmers now own well in excess of the 11 per cent issued to them in the IPO.
The conversion of Kerry Co-operative into a listed company has been a huge success. Shortly after the IPO three of the country's remaining five dairy co-ops were restructured into listed companies.
Kerry Group's share price closed on Thursday at €20.68 ($39.98), giving it a share market value of €3.64 billion compared with a mere €60 million when it listed in 1986.
The company has had an aggressive international expansion strategy, which includes New Zealand where it had sales of $29.8 million in the December 2006 year.
Just 50 years ago most Kerry farmers took their milk to the dairy factory in tiny two-wheeled, donkey-drawn carts whereas New Zealand farmers were motorised 30 years earlier. Kerry farmers now shop in New York, London and Milan and have holiday homes in Florida and Portugal.
Kerry Group's share market listing has contributed to this enormous wealth creation and the success of the Irish economy.
One of the big issues faced by Fonterra and Kerry is the issue of control, particularly the threat of takeover by offshore interests.
Fonterra will be protected from this by three main features:
* The co-operative will initially own 65 per cent of the listed company and cannot go below 50.1 per cent.
* An outside investor cannot own more than 10 per cent of the NZX entity.
* Fonterra's headquarters and key head office functions must remain in New Zealand.
When Kerry Group listed it had two types of shares: "B" shares held by the co-operative and "A" shares for all other shareholders. At all times the number of "B" shares had to exceed the number of "A" shares.
The original Kerry two-tier share structure has been abolished, following approval by farmers, and the co-operative's stake has fallen from 80 per cent to 23.8 per cent. The main reason for this is farmer shareholders in the co-operative have become so enamoured with the stock exchange listing they have voted for the co-operative to distribute its Kerry Group shares on a pro rata basis to members.
Irish farmers discovered it is the Kerry Group that is taking over the world, rather than the other way around, and they retain effective control of company because the co-operative appoints 10 of the 13 Kerry Group directors.
Based on Kerry Group's sharemarket value Fonterra would probably be worth in excess of $10 billion if it listed today.
The arguments in support of Fonterra's sharemarket listing are so compelling that it would not be surprising if farmers lobbied to accelerate the proposed timetable and the company listed before its 2010 target date. A successful Fonterra restructuring would also encourage other agriculture co-operatives to follow suit and list on the NZX. This would also be great news for the rural sector, New Zealand economy and domestic investors.
* Disclosure of interest; Brian Gaynor is an executive director at Milford Asset Management.
