Fonterra's new fund clears path for outside investors

Graham Stuart

Plans for a fund allowing the public to buy an indirect stake in Fonterra have been given a boost after the dairy co-operative said it would not oppose the scheme.

Only Fonterra suppliers are able to own shares and exercise the voting rights attached to them - although these ownership rights were set to be extended to sharemilkers next season, the company said yesterday.

But a Dairy Equity Fund is being set up to allow outside investors to buy rights to the so-called value-added "dividends" and capital gains that Fonterra shareholders receive.

Asked for the company's opinion on the new fund, strategy and growth director Graham Stuart said Fonterra was taking a neutral stance.

He said farmers could already raise loans using shares as security, with the co-op maintaining a register of agreements.

Farmers could also come to private arrangements to allow outside investors to pay for new shares in a farmer's name and get the financial benefits from them.

The fund would therefore be an addition to the financial intermediaries already offering farmers services related to their Fonterra shares, Stuart said.

Fonterra wanted to help farmers have "the most liquid set of arrangements with their chosen financiers".

Stuart's positive comments follow news that sharebroker ABN AMRO Craigs has formed a joint venture with the fund's originators GT and Co to market the fund to investors.

Geoff Taylor - one of the scheme's originators - has a long-term goal of the fund paying for up to $800 million worth of Fonterra shares, which would give outside investors a sizeable "de facto" stake.

But Stuart said he would be unconcerned by this and had not heard of farmers being worried either.

The fund idea simply involved a financial derivative and "there's plenty of constitutional protection around voting rights and things like that".

However, Stuart was lukewarm over a suggestion the fund could be a way of unlocking farmer capital to pay for industry expansion.

He said there were already a "myriad" of financing arrangements available to farmers.

These arrangements had put about $550 million into Fonterra since it was formed and production had grown consistently.

"Those aren't the sort of things you'd expect in a capital constrained environment."

On Monday, Fonterra revealed plans to more explicitly separate its payments for milk, and the so-called "dividend" from value-added activities.

At present this "dividend" is identified retrospectively as a portion of total payout.

It includes returns from such activities as branded products and the value-added ingredients business.

Stuart acknowledged some farmers wanted to swap the longer-term benefits of share price growth for the shorter-term cash flow gains of a higher "dividend" yield.

But he said total returns to Fonterra shareholders - "dividends" plus share price growth - were "in line with the better food companies in the world". The company has previously said the average total return for the three seasons to 2004-05 was just under 15 per cent.

Also, chief executive Andrew Ferrier has forecast profit growth of more than $120 million this season from value-added activities.

Meanwhile, Stuart said Fonterra was moving to formally allow sharemilkers to own shares next season.

OPENING UP

* Fonterra will not oppose Dairy Equity Fund plans to buy dividends and capital gains from dairy farmers.

* Extending share ownership to sharemilkers will be introduced next season.

* But Fonterra says there is no shortage of capital available to help farmers expand without them having to "cash up" shares.