KEY POINTS:
Fonterra directors say they looked at half a dozen "broad options" on restructuring the cooperative's approach to raising capital - and discarded four in the first stage of the process.
The company announced today that it wants shareholder farmers to agree to split it into a milk-supply cooperative and an operational subsidiary listed on the NZX so sales of shares to outside investors can raise capital needed for overseas investments.
The cooperative will have limited ability to sell down its stake in the listed company and a range of legal and constitutional protections will be provided for farmer control of the cooperative and its subsidiary.
The other option selected for further development and independent review was partial or full divestment of downstream business. It would have required Fonterra's international and consumer businesses to be packaged in a separate company and listed, with the cooperative retaining a majority stake, and farmers able to also hold individual shares.
It was rejected because Fonterra will not compromise its growth strategy, which relies on the vertical integration that gives the company ownership of its dairy products from the cow to the consumer.
"Any decision to divest part of the business should be made for the right reason - not just to address capital structure," the company said.
This option would also have failed to address the redemption risk which is growing as the rising value of shares in the cooperative increases the likelihood - and the potential effect on cash flow - of large numbers of farmers cashing in their shares in the same season.
Two of the options rejected early on would have maintained an integrated business.
One, would have left farmers holding a nominal "A" shares in the cooperative with full voting rights but valued at just a few cents. Non-voting "B" shares would have been fully tradable, entitled to dividends, held by farmers in proportion to their cooperative shares, with extra "B" shares sold to the public.
It was rejected because the market would have discounted non-voting shares in a company with no history as a listed entity.
This value destruction would have made it hard for Fonterra to raise sufficient capital at competitive cost.
Hybrid debt-like securities - fixed or earnings-linked dividend equities - were also rejected because they would not have tackled redemption risk and their limited voting rights would have made them less attractive, and eroded the potential to raise capital. Pre-set interest payable on the hybrid debt would have taken priority of milk payouts, making farmer earnings more volatile.
The other two options involved splitting up Fonterra's business.
Letter stocks, a "B" share for ring-fenced businesses within Fonterra would have traded at a big discount on their underlying value, again failing to generate enough capital.
And giving the farmer cooperative a "call" option - the right to purchase at a future time the NZ-based assets of a listed Fonterra company - would have split the business and hurt Fonterra's vertical integration. The call option would have hung over Fonterra's business like a mortgage.
- NZPA
