KEY POINTS:
Major dairy industry players - including Fonterra's fourth-largest private milk supplier, Otago farmer Grant Paterson - look set to oppose the company's capital shake-up, a sign that its board could face major hurdles getting shareholder support.
But state-owned farming company Landcorp, another of Fonterra's five largest supplier, agrees in principle with the restructuring.
Chief executive Chris Kelly said Fonterra needed more capital and, provided the final details were acceptable, Landcorp would vote in favour.
Paterson, who owns 18 dairy farms milking more than 10,000 cows in Otago and Southland, said Fonterra's proposal meant farmer-shareholders would give away too much of the company.
He said the restructuring was covering up for weak management and governance.
Fonterra announced plans last week to raise equity for overseas investment by splitting the company into a farmer-owned holding company and an operational arm to be floated on the stock exchange.
The holding company would initially own 65 per cent of the listed operational entity, individual farmers 15 per cent and external investors 20 per cent, but that 65 per cent could eventually fall below 50.1 per cent to a minimum of 35 per cent.
Paterson said Fonterra's overseas investment had a poor track record.
"They have poured more than $2 billion in to Australia for virtually no return. The best return they have had, as I understand it, is 7 per cent from Chile."
He said the contribution from the company's value-added business, activities other than commodities, had also been poor, and the only way for it to improve was from a lower milk price which would hit farmers and compromise the level of dividends paid to investors.
Paterson, the brother of prominent South Island businessman and corporate dairy farmer the late Howard Paterson, said Fonterra had the potential to be a strong, profitable company.
"I don't want it to be the biggest company in the world, I want it to be the richest."
Capital could be raised through issuing capital notes and from savings by fine tuning the business and cutting costs in areas such as public relations and staffing.
Paterson has a 3 per cent shareholding in a new rival dairy processor Dairy Trust of which he is also a director, but said he intended remaining a partial shareholder and supplier to Fonterra.
Kelly, of Landcorp, said restructuring was inevitable.
"The day they moved to the fair value share was the day they went down the slope of extracting equity and, importantly, getting good, robust methodology into valuation of its share and liquidity in that market."
The key was finding a new way of valuing milk to calculate a dividend for external investors and a return for farmers.
- Otago Daily Times
On the list
* A new company will own the assets, liabilities and operations of the Fonterra co-operative.
* The co-op will retain a 65 per cent stake, 15 per cent will go to farmers and 20 per cent will be publicly held.
* Farmers will vote in May on whether to adopt the two-company structure.
* A vote in 2010 will decide whether to list the new company.
* If the company does float, 50.1 per cent of shares must be held by NZers.
