Fonterra shake-up back on the table

Henry van der Heyden. Photo / Paul Estcourt

Capital structure reform of New Zealand's biggest company, Fonterra, is to be a staged process, with shareholders likely to be asked to vote on the first of up to four steps in November.

It will be the co-operative dairy giant's second attempt to agree on a structure that will provide capital for growth and address the risk in having redeemable shares, but details of the proposal are being closely held until farmer-owners have heard them.

Chairman Henry van der Heyden would only confirm that the restructure would be in steps.

"We believe it will stretch over three or four years [in] a series of steps, they will be small steps."

Extensive consultation would be held with Fonterra's nearly 11,000 farmer shareholders before they were asked to vote on the first stage, van der Heyden said.

It had not yet been decided to hold the first vote at the November 18 meeting. However, farmers said they expected to be asked to vote then.

The board's softly, softly approach this time round follows an aborted restructure attempt last year and new negotiations with the shareholders' watchdog council to shape reform palatable to farmers.

The board's first proposal involved splitting the $15 billion co-operative into two companies - a supplier-owned co-op, and a listed entity.

The proposal failed to win the required 75 per cent approval because as the council put it: "In focusing on maximising capital value, the board paid little regard to whether the proposal would be acceptable to farmers ... for Fonterra farmers, payout, control and ownership all go hand in hand."

The possibility of a public listing of Fonterra shares has been eagerly anticipated by the sharemarket. Non-farmers have limited opportunities to invest in dairying, New Zealand's economic cornerstone.

Van der Heyden would not comment on whether the new proposal included a public listing.

The Government has not been consulted on the proposal.

This suggests the first stage will simply involve asking farmers to approve a change to the constitution to allow for subsequent fundamental change, or approval to seek Government support for such change, or both.

Fonterra, which controls 92 per cent of the country's raw milk supply and is the world's biggest dairy exporter, is governed by the Dairy Industry Restructuring Act 2001.

Noting the second attempt was "a sensitive issue", van der Heyden gave an "absolute commitment" for a proper consultative process with farmers.

"They won't get delivered something with 'here it is, yes or no'."

Even so, his board could have a tough job convincing shareholders to step into the unknown at this time. Many farmers are financially distressed after falls in Fonterra's payout on the back of the global recession and the strong Kiwi dollar.

Their debt levels are causing concern to their bankers, with credit and overdrafts tight going into a new season.

In play in the restructure timetable will also be the 2013 general election. If Fonterra needs legislative change - and it is difficult to see how it will not - it will not want to risk a bill process in an election year when "every man and his dog will have a view", as a high-level industry observer noted.

Fonterra requires new sources of capital to achieve a three-part growth strategy: To build its overseas business using non-New Zealand milk and selling its logistics and supply chain management expertise to big international food companies, to build its ingredients business portfolio through acquisitions and R&D investment, and to move from a cross-border trade to being a behind-borders player, for instance becoming a dominant player in China where huge dairy consumption growth is expected.