KEY POINTS:
Throughout history, farmers have been a conservative lot. Those looking to them for radical flourishes have, more often than not, been disappointed. It is probably not surprising, then, that Fonterra, the farmer co-operative carrying this country's hopes of international renown for top-shelf dairy products, has proved largely risk-averse.
The global ambitions enunciated at its birth have not been translated into action. That may, however, be about to change if dairy farmers embrace the bold path outlined by Fonterra management.
Many of the 10,000 shareholder-suppliers will doubtless blanch at the thought of all of Fonterra's assets, liabilities and operations being split from the co-operative and listed on the stock exchange. They will continue to argue that this will be the prelude to losing control of Fonterra. Yet, in reality, this plan offers farmers the best of both worlds. Not only will the company be able to raise enough capital to fund a global growth strategy but legal and constitutional safeguards will ensure it does not fall into the arms of external investors. Protections denied other corporates seeking the advantages of listing are guaranteed.
This will be achieved in several ways. The constitution will stipulate that the co-operative's initial 65 per cent stake in the listed company will not be allowed to drop below 50.1 per cent without 75 per cent farmer approval. Additionally, the Government says it will legislate to ensure that stake cannot drop below 35 per cent. There would also be a 10 per cent cap on other shareholdings, and a requirement for 50.1 per cent of the company's shares to be held by New Zealanders. As if that was not enough, the Government would also decree that the company's headquarters remain in this country.
The main question-mark over that degree of protection is whether it would discourage interest from potential shareholders. They are free to invest in companies that offer no such restrictions and have far greater liquidity. Fonterra's trump-card, of course, is the extremely good health of its business and the bountiful opportunities waiting to be tapped, especially in Asia and South America. But that should not prompt the notion that farmers could impose even stricter safeguards without a reaction from investors.
Fonterra's management is obviously wary of this tendency. That is why it envisages a two-step progression to listing in 2010. It knows this will not be an easy sell, and that it may take all that time to get some farmers to budge. It may also see this proposal as an opening gambit, and have fallback positions in mind if the required 75 per cent approval seems unlikely. It would not want to retreat too far, however. This proposal is already sugar-coated for farmers. Any more controls would greatly diminish the value that the market places on Fonterra shares. The best course would be to adopt this plan and confirm Fonterra's appeal before testing the market's willingness to entertain the likes of non-voting shares.
As it is, the proposal fulfils Fonterra's three ambitions. It will receive the $3 billion to $5 billion in investment that it says is necessary over the next five years to pursue overseas growth opportunities; it will reduce the redemption risk of farmers cashing in their shares; and farmers will gain more investment options. On the other side of the coin, investors get the chance to share in the growth of the dairying sector, and the sharemarket gains the bluest of blue-chip stocks.
Most of all, however, this is about arming Fonterra to take on the Nestles of the world. It would, as Fonterra chairman Henry van der Heyden said, be "a significant evolution, not tinkering at the edges". On this occasion, there is good reason for farmers to be bold.