Fonterra chief executive Miles Hurrell says an initial public offering (IPO) for the dairy company's big Australian consumer business "jumps out" as an option to give capital back to shareholders and grow the business faster.
Fonterra would retain a "significant" stake, and while Hurrell wouldn't be drawn on the size, he didn't rule out it keeping a majority stake.
New Zealand's biggest business floated the idea of the IPO along with its FY21 results and earnings and investment forecasts up to 2030, which also signalled the sale of its Chilean business.
One of Australia's three biggest dairy companies, Fonterra Australia could be worth $1 billion to $2b as a separate listed company, reports in Australia suggest.
Fonterra's FY21 results showed the Australian business had ebit of $74m, compared to $54m in 2020. Revenue was $1.95 billion, compared to $2b the previous year.
The business is fully integrated from manufacturing operations supplied by New Zealand milk and Australian dairy farmers to consumer goods production.
Its competitors include Saputo, which bought co-operative Murray Goulburn in 2018, and Bega.
Hurrell said Fonterra had not yet appointed an investment bank to explore an IPO - that process would start now.
He said the IPO idea was "in its infancy" but the newly released forecasts and business strategy suggest the intention is to divest the Australian business and the Chilean Soprole and Prolesur companies by FY24, when Fonterra intended to return about $1 billion to its farmer-shareholders, through "planned divestments and improved earnings".
"Now we've made the (IPO) call, we will stand up a team very quickly to start moving. We will move at a pace the market will determine, at the same time we want to see what the appetite in the market is.
"If the valuations don't come back with numbers we are comfortable with, we won't be rushed into anything.
"But we think the timing is right. Our business is in very good shape there (Australia). It's a large consumer business with huge opportunity.
"We think a different ownership structure could take it further and faster."
Hurrell said Fonterra, a farmer-owned co-operative, would retain a significant stake in any IPO because the business was an essential part of its 2030 strategy.
"It takes a lot of milk solids from New Zealand, mainly for the cheese category. It's an important market for our milk solids."
If the company wasn't comfortable with the market valuations of Fonterra Australia, it would stick with the status quo, said Hurrell.
"But we think now is the time to take a bit of capital off the table and redistribute that and give opportunity for some other ownership.
Fonterra turned in disastrous financial results in 2018 and 2019 as a result of huge loss-making investments in overseas milk pools and companies, particularly in China. Farmer-shareholder watchdog the Fonterra Shareholders' Council said at the time shareholders had suffered $4 billion of wealth destruction.
Under new leadership since 2019, the company has reset its business strategy to focus on the unique provenance of New Zealand milk and its proven R&D accomplishments in specialist nutrition and wellbeing products.
Hurrell said an IPO could provide the opportunity to restore farmer capital.
"The IPO jumps out because it gives optionality. When thinking about our capital structure, farmer ownership and control of the core engine of our co-op is not up for discussion.
"But with assets beyond that we can be more selective. Australia is an example, we don't need 100 per cent of that to take it to the next level.
"An IPO gives opportunities for our farmer-owners to be part of it, and some of the Australian community. That's an option on the table but we need to go through the process to determine if it's the right outcome.
"But let's kick it off."
Fonterra's financial achievement targets by 2030 included a 40-50 per cent improvement in operating profit, a $1 billion spend on moving to higher-value products and a $1b return to farmers from asset sales.
The dairy exporting heavyweight said it was targeting a dividend of 40-45c per share, up from 20c a share in the 2021 financial year. The dividend was projected to rise to 30c per share by FY27.
Capital investment would be increased from $600m in FY21 to $800m in FY22-24, rising to $980m-$1b in FY28-30 as Fonterra pursues a strategy of differentiating New Zealand milk, growing its foodservice and active living activities and further strengthening consumer businesses.
Another $1b was planned to be invested in sustainability measures by 2030.
The company is targeting an average milk price to farmers of $6.50-$7.50/kg of milksolids for the next nine years.
As already signalled in its 2018-2019 strategy reset, the company aimed to be a leader in dairy innovation and science, intending to invest 50 per cent more in R&D by 2030.
Products would increasingly emphasise the provenance of New Zealand milk and high standards of cow care.
While Fonterra reset its business strategy two years ago after disastrous 2018 and 2019 financial results, details have been thin up until now.
The strategy announcement will be important to Fonterra's 10,000 farmer-owners who made it clear in recent capital restructure discussions with the company that they wanted to see financial forecasts before being called on to vote at the end of this year.
The sale of the Chilean businesses, Soprole and Proleseur, would mark the end of a relationship going back many decades between the New Zealand dairy industry, started through the former Dairy Board, and the South American country.
The process to sell the integrated business had started, said Fonterra. Soprole has a high-profile brand position in the Chilean consumer food and beverage market. Its subsidiary Prolesur sources milk and manufactures in southern Chile. Neither business needs New Zealand milk or expertise, Fonterra said.
Fonterra's FY21 annual results show the Latin America business had ebit of NZ$75m, compared to $42m in 2020, and revenue of $1b ($926m).