Changes will let public buy into Fonterra

The public will get a chance to invest in dairy giant Fonterra under capital restructure plans released yesterday by the co-operative.

The first two steps in a capital change process were approved last year, allowing farmers to buy more shares than required by their production and changing the way shares were valued to recognise the market was restricted to the co-operative's farmer owners.

Fonterra yesterday released details of a proposed third step to allow share trading among farmers.

The possible changes would give farmers more flexibility to buy and sell shares to match cash flows and give the company permanent share capital to grow returns, Fonterra said.

Chairman Sir Henry van der Heyden said the first two steps would strengthen the co-operative, while step three would remove the redemption risk of capital moving in and out of the company as production rises and falls.

As part of the proposal a new Fonterra Shareholders Fund would be set up to help farmers free up cash.

"This fund is important to Fonterra," van der Heyden said. "Today some of our farmers are quite tight with cashflow. We want those farmers to stay with the co-operative... the fund will give them the ability to be able to do that."

The fund would pay farmers for the right to receive dividends and the gain, or loss, from any change in value of shares. This would enable farmers to buy new shares or retain shares they would otherwise have to sell.

The fund would raise money by selling investment units and investors could include sharemilkers, retired farmers, institutions and members of the public.

Adrian Vance, director at sharebroking firm Hamilton Hindin Greene, said Fonterra was a great company and any access investors could get would be received well.

"My gut feeling on Fonterra has always been it would be fantastic for New Zealanders to be able to gain exposure to a company which is obviously our best in terms of primary produce," Vance said.

"It comes down to global growth, population growth and demand for the product so any way that we can have more access to some of these top class New Zealand businesses the better."

However, Fonterra said farmers would remain the owners of the shares and the unit holders and fund would not have any voting rights.

Chairman van der Heyden said the primary objective of the change was to eliminate redemption risk, get a stable balance sheet, protect the co-operative and to grow returns for farmers.

"Our farmers made it very clear that they wanted to 100 per cent control and own their co-operative," van der Heyden said. "This is not in any way trying to actually play to the investment community."

Fonterra chief executive Andrew Ferrier said the votes and shares would remain with farmers while the fund was for people who wanted to have units that would move generally in the direction of the Fonterra share.

"There's a number of different possibilities [for trading]. Certainly we think it's sensible to have a unit traded on a registered exchange," Ferrier said.

"That's something we'll continue to work through [in] consultation with our farmers."

Shareholders' Council chairman Blue Read said there was broad agreement between the council and board on the concept.

"On that basis what we've got is the bones of a proposal," Read said. "The shareholders are being invited, I guess is the right way to put it, through this consolidation process to actually help develop and help shape."

The first round of consultation meetings would be held with farmers next week, after which the proposal could be fine-tuned and a second round of meetings would follow in May,

A special meeting could be held in June or early July, with Fonterra needing 75 per cent support from farmers and the earliest a share trading system could be up and running would be the middle of the year.

Q&A

What is the new scheme?

Farmers are already able to buy shares to the value of 120 per cent of their expected milk production.

Yesterday's announcement will allow farmers to hold twice the shares required by their production. They will be able to trade shares among themselves, rather than relying on Fonterra to buy shares back.

This is the third step in a restructuring. The first two steps allowed farmers to own more shares than required by their production and changed the way shares were valued to recognise the market was restricted to the co-operative's farmer owners. Fonterra introduced the first two steps after about 90 per cent of farmers voted in favour in November.

The move to farmer trading would need 75 per cent approval from shareholders.

Why the new scheme?

Fonterra hopes to free up capital because it will no longer have to buy shares off farmers.

Instead other farmers will buy the shares.

What has the take-up been like?

As of January, about one-third of Fonterra's farmer shareholders had spent $270.7 million buying new shares.

What are the benefits of the new scheme?

The scheme allows Fonterra to free-up its balance sheet.

Instead of having to pay farmers for shares, the co-operative can now spend the money on expansion.

Until now farmers have had to hold enough shares to cover the volume of their milkflows, and when those milkflows drop Fonterra has had to find the cash to pay out the unused shares.

This has cost the co-operative hundreds of millions in the past two years. Trading among farmers could also provide more flexibility for farmer shareholders to run their businesses with farmers being able to buy in the good times and sell in the bad.