Kiwi's bold plan to stem potential cash-up crisis

By PHILIPPA STEVENSON and NZPA

Kiwi Dairies has proposed a radical share restructuring for its dairy farmers which could greatly boost the cost of shares suppliers would need to hold to provide "new" milk to the company.

The company is also planning an industry-first launch of capital notes to be issued to farmers in lieu of cash for their shares when the shareholders quit the industry or reduce their production.

Capital notes, and the concept of a fair value share standard, are central to the company's proposals to cope with paying for new factories to process soaring milkflows and solve how to pay out farmers cashing in their shares in the company without bleeding it dry.

Both Kiwi and the other major company, New Zealand Dairy Group, face potential problems over share values should the industry deregulate.

In theory, it would be tempting for big suppliers to immediately cash up millions of dollars worth of shares and then transfer their allegiance - and milk supply - to a new company, possibly owned by overseas shareholders.

Kiwi said its plan tackled the problem of fair share values as well as coping with peak milkflows - requiring new suppliers to buy into the company and paying out exiting shareholders at a fair price.

To do that, it proposes setting a fair value share standard each season, based on discounted cashflows rather than company profits.

The standard would determine the number of $1 shares needed, and as the value of the company increased, a higher number of shares would need to be bought from the company to produce extra milk.

It would also determine the price farmers will get for their shares when selling up.

For this it plans to persuade farmers that instead of continuing to get cash in the hand when they surrender their Kiwi shares, they should instead accept capital notes.

The market value of these notes would not necessarily be their face value, but would fluctuate, and farmers would be able to buy and sell them on the Stock Exchange or privately on Kiwi's website.

Because the notes will carry no shareholder rights, anybody will be able to buy them, and draw the interest they attract, probably at a rate slightly above those of bank bills.

Farmers who meet Kiwi's criteria for suppliers will be able to buy capital notes and convert them, at face value, to the necessary company shares, instead of, or as well as, buying the shares directly from Kiwi. The company has said the exact details of its capital notes idea are still being finalised. It is also meeting bankers to find a way farmers can use their dairy company shares to secure bank loans.

Kiwi chairman Greg Gent said the proposal was designed primarily to ensure that correct signals were given on the value of additional milk produced by farmers, and so that existing shareholders' returns were not diminished by the growth in milk supply.

At present, he said, the wealth of shareholders who had already invested in added-value business was constantly being diluted by additional milk production from existing and new shareholders, and these veteran shareholders also received only a nominal value for the shares when they left the industry.

Mr Gent said added-value investments in research, technology and consumer markets took longer to provide returns than investments in commodity processing. But they offered a more secure and better future for dairy farmers than the commodity market, which was declining in real terms.

Another way to solve the problem would have been to split the "added value" business by way of a separate share, but this would lead to the loss of farmer control.

Mr Gent said the capital notes were an innovative way to reward farmers who had made a contribution to the wealth of the company but who now wanted to change land use or leave the industry.

"The fully tradeable capital notes will have a market value which we expect will closely approximate the value of shares."

They would be an interest-bearing investment, but bearers would have no shareholder rights.

Capital notes will also be available to farmers or sharemilkers who can later convert them to full shares in the company provided they meet its supply criteria.

Kiwi chief executive Craig Norgate said the level of notes issued would vary depending on the level of entry and exit from the company. The initial level would be set to ensure liquidity.

"If we are growing 4 per cent per annum, as we have been, you've got an underlying demand for shares in the company of $80 million a year so that's the sort of demand that would be there for capital notes if they were selling at any sort of a discount [to full shares]," Mr Norgate said.

Kiwi has an annual turnover of $3.6 billion, processing 4.4 million litres of milk on behalf of its 5700 farmer shareholders. It has a 39 per cent share of New Zealand dairy production.

Forecasts have shown that South Island dairying during the next five years will experience growth of 24 per cent more herds, a 19 per cent rise in average farm size, a 27 per cent increase in average herd size, and a 48 per cent rise in milksolids produced.

By 2005, the South Island is expected to be producing 30 per cent of New Zealand's milk, with most of the growth having taken place in Canterbury, Southland and Otago.

Dairy Group is now putting its scheme to farmers in a series of 40 meetings around the country. Farmers still have to approve the proposal at a special meeting on December 15.

Kiwi will consult its farmers on its proposal until next March, when shareholders are expected to vote on a share restructuring package.