In the financial long-run Fonterra has been a flop, falling well-short of expectations at its privileged birth 17 years ago.
That's the message from new analysis by dairy industry specialist advisory firm TDB, which concludes there is little evidence Fonterra, created by special enabling legislation from an industry super-merger in 2001, has delivered the anticipated benefits to its shareholders.
"Fonterra has, from a long-run financial perspective, fallen well short of expectations ... In our view a fundamental rethink is required if the company is to add value to its suppliers, its shareholders and the New Zealand economy," TDB said.
Its report, undertaken for Westland Milk Products in the context of the current Government review of the 2001 Dairy Industry Restructuring Act (DIRA), finds Fonterra's long-run financial performance "has not been satisfactory".
"We assess that if Fonterra had delivered the benefits claimed at the time of the merger, its share price should now be around $7.60 to $8.80, compared with the current share price of below $5," the report said.
The big co-operative's share price has fallen by more than 20 per cent this year. This month it posted a historic annual loss of $196 million.
While Fonterra's farmer-shareholders own all the shares, Fonterra has dividend-carrying public units listed on the sharemarket.
Sector leaders who pushed for the merger projected Fonterra's revenue would grow at an annual compound rate of 15 per cent, aspiring to $30 billion a year by 2011.
Fonterra's architects pitched that the growth would largely be a consequence of the industry diversifying away from its commodity base. The merger gave Fonterra 96 per cent of the country's raw milk. At last count it still collected about 80 per cent.
TDB said over the past 17 years Fonterra had recorded annual compound growth in revenue of less than 2.5 per cent. Revenue in 2011 was $19.9 billion and in the latest financial year $20.4 billion.
"Revenue growth has been well below expectations and the much-vaunted growth in value-added products has not eventuated."
Nor had dividends shown any clear growth trend, said TDB director and report co-author Phil Barry.
The lowest dividend had been 7c/kg of milksolids, and the highest 59c/kg. On average the annual dividend had been 29c/kg - the same as the 2001 dividend.
Annual dividends over the past three years had averaged 30c/kg, indicating no sustained earnings growth in the non-commodity business.
Since its formation, Fonterra's normalised earnings before Ebitda had increased by 0.6 per cent year-on-year, said the report.
Fonterra responded the paper was based on the premise that TDB expected to measure merger benefits solely through the share price.
"While our share price is one important measure, it doesn't make sense to measure the benefits of the merger exclusively through the share price. You need to look at the increase in our farmers' equity measure through the farmgate milk price and land and herd values also," said the cooperative in a statement.
"To say that growth in value-add products has not eventuated simply isn't true.
"Our consumer and foodservice business did not exist in 2001 at any great scale. Our value-add business is now bigger than the rest of the dairy industry combined. It makes up 45 per cent of our volumes. And our foodservice business is now a $2 billion a year operation" Fonterra said.
Farmers' milk price had become globally competitive, Fonterra said.
TDB had another view: "We do not think it can be argued that the anticipated benefits of the merger have been passed through to shareholders via the farmgate milk price. (This price) reflects the milk price as set by international commodity markets and is receivable by any farmer supplier.
"A number of independent processors are paying slightly more than the FGMP on average to their suppliers ... and are still earning more than their required rate of return" said TDB.
TDB said the merger business case projected synergies of $310m a year.
"We would expect to be able to measure the realisation of the merger synergies with reference to Fonterra's share price.
"If it is assumed that Fonterra's 2001 opening share price of $3.85 incorporated the present value of all future merger synergies with certainty and if Fonterra had generated its required rate of return on its capital, we estimate the current share price should be approximately $6.40.
"If it is assumed the opening share price ... incorporated the risk-adjusted present value of the future merger synergies, we estimate the current share price should be in the range of around $7.60 to around $8.80."
Since Fonterra changed its capital structure in 2012, its share price had averaged $6.10, with a range of $4.60 to $8.08, the report said.
Fonterra responded: "We are not happy with our current share price. Our focus is on lifting our earnings performance."
"We want a dairy industry and a co-op that farmers, unit holders, employees and the average Kiwi can feel proud of.
"DIRA has enabled New Zealand's dairy industry to grow and become more competitive and this has provided flow-on benefits to the country - for example, for the 2017-2018 season $10.3 billion has been paid to farmers, including farmgate milk price and dividend and 46c of every dollar a farmer earns is spent in their local community."
The merger had achieved the benefits promoted in 2001 and the business case for synergies had been achieved well-within the three year time frame, Fonterra said.
TDB said options for a "rethink" of Fonterra included a fundamental restructure - separating the ingredients commodity business from the consumer and food-service segments.
"Splitting Fonterra would require the brands business to compete for farmers' milk more transparently, wouldn't compel farmers to invest in "risky offshore investments", and would give the business access to outside capital to fund growth," said TDB.
Another possibility was to review Fonterra's "complicated and opaque" Trading Amongst Farmers scheme (TAF) which was not well regarded in capital markets and had inherent conflicts between shareholders and suppliers. TAF enabled Fonterra to list units.
Also an option was a mixed ownership model with Fonterra's ordinary shares publicly listed but the majority of shares and control resting with farmer-shareholders.
It noted the financial performance of Fonterra, as with most companies, had been impacted over the period by some adverse and positive shocks.
It also noted Fonterra provided its farmers with loan support when the milk price dived in 2014 and 2015 "although this is little recompense to outside investors".