Fonterra's board and management have been quietly having a fresh look at the capital structure of New Zealand's biggest company - its farmer-owners are about to hear about progress.
The Fonterra Shareholders' Council, watchdog of the interests of the co-operative's 10,000 owners, is to be briefed this month for the first time on the low-key project.
The council, itself the subject of an in-house review of its performance, relevance and cost - $50 million over 19 years - said in a newsletter that some shareholders were "looking for more progress" on the capital structure review.
They may be looking for a while yet, judging by council and company responses to Herald questions about the capital structure review.
Fonterra would only say a small team from the board and management was looking at capital structure.
"We have no preconceived outcome. It may be that no change is needed. These discussions are critical to the future of our co-op and for that reason, we won't rush it.
"So far, the discussions have just been between board and management but there will be a time when we need to hear from our farmer-owners and unit-holders."
The council, which urged "a full review" of Fonterra's milk payment system and capital structure in its annual report last year, said it could not answer questions yet.
This month's briefing would be the first update it had received and it would "update shareholders as there is something to report".
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The call last year for a capital structure review follows Fonterra's recovery effort after two disastrous financial years and at least $4 billion of wealth destruction for its farmer-owners - the result of poor investment decisions offshore and a poorly executed business strategy.
Replacement chief executive Miles Hurrell and a largely new board have implemented a back-to-basics rescue business strategy with the focus on New Zealand milk. Interim 2020 results in March indicated the slide had been reversed. Fonterra's 2020 financial year ends on July 31. It will report FY20 results in September.
Outgoing chairman Duncan Coull in last year's council annual report said retaining New Zealand milk supply was critical to the success of the new business strategy, therefore it was imperative that Fonterra's capital structure and performance were aligned to achieve that.
While Fonterra is owned by its shareholding suppliers, under a 2012-introduced regime called Trading Among Farmers (TAF), outside investors can buy units in farmer shares. These are listed. Managed by the Fonterra Shareholders' Fund, they are dividend-carrying but unit-holders cannot vote. (This structure inherently creates tension: Farmers want the highest milk price Fonterra can deliver from earnings; unit holders focus on the dividend.)
However in urging the capital structure review, Coull said TAF was a tool - it was not Fonterra's capital structure.
"Structure extends across the entire business from capital structure to governance, [shareholder] representation and management, to milk price and beyond.
"Structure is about maintaining relevance to the strategy in the environment we operate in.
"There has always been a reluctance to talk structure within our co-op in fear of any possible implications of change. If we had a higher level of trust, then I believe the fear would dissipate."
Coull said first Fonterra needed to identify the best capital structure and then consider the place of TAF and the Fonterra Shareholders' Fund within that.
While some shareholders are said to want progress on a review, others have told the Herald the call for it was simply a distraction tactic from last year's $605m net loss and the previous year's first ever loss of $196m.
Nevertheless, the sharemarket is eyeing the review with interest.
Arie Dekker, managing director research at Jarden, believes getting consensus on capital structure will be difficult and the process will take time.
In a recent client note he said the investment case for Fonterra was still challenging and its current earnings needed to grow to support current market valuation.
The focus remained on what Fonterra did with its capital structure and positioning itself to be competitive for New Zealand milk in the long-term, he said.
"Fundamentally we see these decisions as being linked to the size and scope of the co-operative's activities and we continue to think the best option will see [Fonterra] commit to downsizing the business around its core NZ ingredients engine while continuing to grow the Asia/Greater China food service and consumer business that feeds from NZ-sourced milk.
"This reflects our view that there is little alternative given the desire to remain a co-operative; limited access to capital from [Fonterra] farmer-shareholders and a long history of largely failed attempts to broaden beyond core skill sets through relatively small investments and partnerships that have indeed reflected the capital constrained nature of the business."
Dekker wrote that the capital structure work should highlight two things: More flexibility/reduced investment in the co-operative for farmers would help retain milk supply; as would confidence in Fonterra's ability to sustainably generate a fair return on farmer capital.
Mark Lister, head of private wealth research for Craigs, said Fonterra's capital structure and governance were probably part of its "mediocre" financial performance.
"[There's] too much debt in the company, too high a cost structure and near the top of the list, pretty poor decisions in terms of strategic-level investment. Then there's the conflict between farmer-shareholders and [unit] investors ..."
As a co-operative, Fonterra couldn't do capital raisings like normal listed companies.
"The conflicts will always be there. It's really hard to see a time when they won't have those, or governance limitations," Lister said.
"While you will have a group of forward-thinking farmers happy to consider all options, there will be a big group of traditionalists who don't want to relinquish any control or voting rights."
Lister said while the Fonterra unit regime had not proven profitable for investors in recent times, the primary sector was under-represented on the sharemarket and Fonterra was a big business in one of New Zealand's most important industries.
"People would like to find a way to get that exposure."