Fonterra to put capital structure shake-up to the vote

Fonterra's 10,000 farmer-owners will be asked to vote on December 9. Photo / NZME

The board of big dairy co-operative Fonterra has decided to present a capital restructure proposal to shareholders for a vote at the annual meeting next month.

While consultation on the proposal with farmer-owners has been ongoing throughout the year, with some tweaks announced in September before a second round of discussions, Fonterra leaders have been clear that if they believed the support wasn't there, they wouldn't put the reform forward for voting.

The proposal, which sets new shareholding requirements to have milk accepted, opens share buying to additional farmer classes such as sharemilkers and caps the existing Fonterra listed unit fund, requires a 75 per cent vote of support from the company's 10,000 shareholder base.

The overall limit on the size of the fund would be reduced from 20 per cent to 10 per cent of total shares on issue, said Fonterra in a statement to the NZX. This is instead of having a total ban on any further farmer shares being exchanged into units, it said.

"This recognises that the fund size, which is currently around 6.7 per cent of total shares on issue, could change from time to time subject to the overall limit. Shares will not be able to be exchanged into units on a day-to-day basis and the board retains its current rights to regulate this process," the statement said.

Another change from the September version of the proposal is the introduction of thresholds to support the alignment of share ownership and milk supply and to reflect Fonterra's intention that the total number of shares on issue in the co-operative is within plus or minus 15 per cent of total milk supply and that the proportion of shares held by ceased suppliers is less than 25 per cent of shares in the cooperative.

These changes and the cap level were in response to the latest round of consultations with farmers and the independent directors of the Fonterra Shareholders Fund, the unit fund, Fonterra said.

The farmer-elected co-operative council had voted 92 per cent in support of the recommended reform.

As Fonterra was created under statute, the Dairy Restructuring Act 2001, the restructure also requires Cabinet approval. This is not assured and may take time, judging by documents released under the OIA.

They suggest Ministry for Primary Industries staff analysis and resources would not be devoted to the restructure question until it is seen if shareholders vote it in next month, which means relevant ministers would not consider policy recommendations until after the vote.

That expectation seems to be shared by Fonterra chair Peter McBride, who said June 1, the start of next year's dairy season, would be the earliest a capital restructure could be implemented – and that was "quite a strong target".

"These things take time and the Government is dealing with a lot of issues."

Agriculture Minister Damien O'Connor opposed Trading Among Farmers, the capital structure Fonterra introduced in 2012 and which will be replaced by the proposed new structure, so may not be an easy or quick convert.

Fonterra's board wants the capital shakeup to support a sustainable supply of New Zealand milk that the company's long-term strategy relies on. Milk production in this country is flatlining and tipped to decline due to environmental pressures, new regulations and alternative land uses. Competition is also a threat. While still collecting the bulk of national milk production, Fonterra faces increasing competition for milk from emerging and expanding independents.

New Zealand's biggest business wants to make entry to, and exit from, the co-operative more flexible, make membership more attractive by easing capital requirements, and protect farmer-only ownership by restricting the listed market for shares and units. The unit fund will be capped and the existing farmer-only share trading continue.

McBride said fund chairman John Shewan had been informed of Fonterra's decision to push on to a vote and discussions were continuing with the fund.
When the proposal was first announced in May and a temporary halt imposed on farmers exchanging shares for units, the price of farmers' shares tanked.

McBride said in the first round of consultation with farmers, "initially reaction was all about the share price".

"But on the journey has come a deeper understanding that it's all about the medium to long term sustainability of the cooperative – and that's really important to them as well.

"They're much more supportive and more coming to terms with it. Capping the fund was the issue, but the second time it's more positive and there's better understanding of the issues."

As part of the reform package, Fonterra proposes additional measures to support liquidity in farmer-only market, recognising there could be lower share trading levels, so the share price could move more on small volumes. These included allocating up to $300 million to support liquidity as farmers transition to the new structure, through an on-market share buyback "and other tools".

Chief executive Miles Hurrell said shareholders' fresh confidence in the co-operative had given the company confidence to take the proposal to vote.

Chief executive Miles Hurrell. Photo / Dean Purcell

In September, along with its 2021 financial results, Fonterra in a historic level of disclosure, revealed its earnings and dividend targets and goals for the next 10 years.

Hurrell said the company wanted shareholders to see the shape of the co-operative mid to long term.

"That's why we put a stake in the ground. We couldn't have had that conversation (about the restructure) if in the past couple of years we hadn't done significant work getting our balance sheet in better shape, understanding our risk appetite and getting to the stage where we could talk about that long term. That's why we put out our 2030 aspirations.

"It's given them confidence and therefore us the confidence to proceed."

Hurrell said Fonterra's reset business strategy had gained momentum since the September disclosure.

The milk price forecast had lifted, the food service business had hit $3 billion revenue, and last week a major collaboration had been announced for scientific nutrient development with big US biotech company VitaKey.

Lab trials on reducing methane emissions had graduated to farm trials, he said.