Farmer-owned cooperative looking to change capital structure to fund growth, with options including joint ventures.

Livestock Improvement Corp (LIC) - the farmer-owned cooperative that supplies three quarters of the New Zealand dairy industry with bull semen - is looking to change its capital structure as it sets its sights on reaching $1 billion in revenue by 2025.

The company, which listed on the NZX's alternative market in 2004, has engaged external consultants to advise on its options as part of a review, but farmers will remain in full ownership and control, regardless of the outcome, said chief executive Wayne McNee.

"The only thing that is an absolute is that we will continue to be a co-operative, but as we grow the business and deliver on the targets that we have set ourselves, we will need capital to fund growth," McNee said.

LIC's revenue came to $199.5 million in the May 2013 year and McNee said the company typically recorded growth of 10 per cent a year.


However, in order to hit the $1 billion mark by 2025, annual growth of around 15 per cent would be required, he said.

"We can borrow to fund some of that growth, but ultimately we will need to look at other options," he said.

The options included joint ventures with other investors or some other method of capital raising.

LIC has strong links with Fonterra because of their shared heritage - both originated from the New Zealand Dairy Board.

In 2012 Fonterra set up the NZX-listed Fonterra Shareholders' Fund, which gives non-farming investors access to the company's dividend flow without conferring voting rights, but McNee declined to be drawn as to whether LIC would go down a similar track.

LIC's consultants are expected to advise the LIC board of its options in August. As it stands, only dairy farmers can own the two classes of LIC share. Farmers acquire voting shares when they buy LIC products. The non-voting, dividend-bearing shares can be bought and sold on the NZAX, but only by dairy farmers. No individual farmer can own more than 2.5 per cent of the investment shares. The $1 investment shares have performed strongly since listing in 2004, closing yesterday at $8.

LIC was set up under the Dairy Industry Restructuring Act 2001, which enabled the formation of Fonterra by permitting the merger of Kiwi Co-operative Dairies, the New Zealand Co-operative Dairy Co and the Dairy Board.

As LIC owns and holds the dairy industry's database, any changes to its constitution requires ministerial approval. LIC is in the process of transferring ownership of the database to DairyNZ, an industry good organisation, representing New Zealand's dairy farmers. "In our view, those constraints of the minister having to approve changes to the constitution are now no longer valid," McNee says.


LIC spent $21 million on research and development last year and McNee said the company will spend more this year.

He expects growth to come from new product streams, particularly in animal health, information technology and LIC's farm automation businesses.

"We will do that by developing our own products and working with others, but also through acquisition. We are looking at acquiring businesses that fit with LIC," he said.

In February, LIC purchased the assets and business of Waikato-based Dairy Automation. The company is also looking at expansion overseas, which at present represents just 6 per cent of revenue.

Bull semen is responsible for about 44 per cent of revenue but its share of earnings is diminishing as LIC's other businesses grow at a greater pace. LIC's herd testing makes up 14 per cent of revenue. System Minder - a herd management system used by about 90 per cent of the country's dairy farmers - makes up 10 per cent and ear tags about 8 per cent.

The company sells bull semen to the United Kingdom, Ireland, Australia, the United States, South America and South Africa. There have been a few small orders to China, a market which McNee sees as having huge potential.