Fonterra chairman Henry van der Heyden has announced one of the biggest changes to face dairy farmers. He says it's bigger than the decision to form Fonterra. If approved, the ownership of the company could leave the exclusive club of dairy farmers. It would be open to new shareholders, including those overseas. Chris Daniels answers the questions.
KEY POINTS:
People really like milk don't they?
Can't get enough of the stuff. Overall global demand for dairy is growing at an average of 2.7 per cent a year. That's 147 billion litres of growth over the next 10 years - or the equivalent of a whole New Zealand dairy industry opening up every year for the next 10 years. World economic forecasts are for 4 per cent growth per annum for the next 10 years.
So if we are doing so well, why do we need to change?
There's a few reasons. One is growing competition. Brazil, Argentina, maybe Russia or the Ukraine, will emerge to compete with New Zealand and Australia. China's industry, for example, is already twice the size of New Zealand's and growing at four to five times the rate. So Fonterra says there are good opportunities to operate in countries looking to develop their own dairy industries. It's already doing this in Australia, the US and parts of Latin America.
So it's not just about exporting New Zealand milk?
It's not practical to use local milk to supply the huge growth in dairy. Fonterra wants to use its "cow-to-consumer expertise" to build profitable businesses using locally produced milk in many countries.
It's grown pretty well so far. Why the need to change?
It's pretty big, by far New Zealand's largest company with revenues of about $14 billion a year. Fonterra, in line with the amount of milk coming out of New Zealand won't keep up with the amount of money needed for this next round of expansion.
So what's the change?
There's currently a "supplier co-operative" - 100 per cent owned and controlled by farmers. This stays. Let's call this "Fonterra Farmer Co-operative". A new company is formed. Let's call this one "Fonterra". All the assets and liabilities in today's co-op would go into Fonterra. For about two years, both of these entities would be 100 per cent owned and controlled by farmers. But the second company, Fonterra, will then be listed on the New Zealand Stock Exchange.
So anyone can buy these shares?
Hold your horses, townie. Farmers would own 80 per cent of it - 65 per cent through the farmer co-operative and about 15 per cent through their own shareholding in Fonterra. You townies can buy shares out of the remaining 20 per cent.
Will farmers still get paid for their milk in the same way?
Little would change on a daily basis in how farmers deal with the co-op. They would still get a pay-out comprised of a milk price plus a return on the Fonterra Farmer Co-operative investment. If farmers hold shares in Fonterra, they would receive a dividend on those shares.
Who will be in charge of these two companies?
The Farmer Co-operative and Fonterra will be governed by separate boards, each with a majority of farmer elected directors. Fonterra will have 10 directors - six farmer directors, who also sit on the co-operative board, and our separate independent directors. In legal terms, Fonterra would be a subsidiary of the co-operative.
So will all shares be the same?
Yes, it's a full share market listing. A Fonterra share owned by a townie will have the same rights and be paid the same dividend as those owned by farmers. They will own so many as to be in charge of the operation.
How much money will all this raise?
Fonterra executives aren't giving exact figures, but it has previously estimated it needs between $3 billion and $5b in investment over the next five years. Others have estimated a float in which 35 per cent of the shares were freely traded - including a 20 per cent stake for institutional investors and the public - would raise $2b-$3b.
So will it be a good investment?
Hard to say. The NZX is looking forward to having such a big company listed. For an economy that owes so much to the agricultural sector, there's precious little opportunity to invest in it through the stock exchange.
So what's the Government going to do about it?
It's agreed to help pass law that would mean Fonterra would be required to keep its headquarters in New Zealand. Its chairman, chief executive and chief financial officer would have to live here too. Also, there'd be laws that no other shareholder other than Fonterra Farmer co-operative could hold more than 10 per cent of Fonterra shares. And only New Zealand dairy farmers would be able to be shareholders in the co-operative. 50.1 per cent of Fonterra's shares would be required to be held by New Zealanders. And in the event a 75 per cent shareholder vote approves taking the Co-operative's share in Fonterra below 50.1 per cent, the co-operative's share in Fonterra could not go below 35 per cent. That means the co-operative would continue to have effective control of Fonterra. Fonterra would also be required to have its primary stock exchange listing in New Zealand, but it's likely to also have a secondary listing, probably in Australia.
So when's all this going to happen?
Not for ages. Farmer consultation will go on until May next year, when there will be the first vote. The first vote will decide whether to change Fonterra into two entities. It will also be to introduce and "road test a more transparent milk price mechanism". This vote won't include any change in ownership. If successful, there will be another two years, during which time legislation will be introduced and a mechanism is arranged for working out milk prices. Sometime in 2010, the second vote will decide whether to go the whole hog - that's to say list Fonterra and introduce external capital. That's when you townies might finally get your chance!
