Dairy firm Fonterra has started a consultation process to seek farmers’ feedback on potential options to change its capital structure for greater financial flexibility.
According to chairman Peter McBride, the capital structure review aims to ensure the sustainability of the co-operative into the future.
The co-operative is temporarily capping the size of the Fonterra Shareholders’ Fund (the Fund) by suspending shares in the Fonterra Shareholders’ Market (FSM) from being exchanged into units in the Fund.
This capping will be effective from 7 May (today) and will remain throughout the consultation process.
McBride explained, “The co-op’s future financial sustainability relies heavily on our ability to maintain a sustainable New Zealand milk supply and protect farmer ownership and control.
“The decisions we’ve already taken in response to the findings of the review – like temporarily capping the size of the Fund – haven’t been made lightly. We appreciate they will have come as a surprise, but they are necessary to keep all our options open while the co-op’s farmer shareholders have a free and frank conversation about our capital structure.”
Among the options, Fonterra is asking its farmers to consider buying back the Fund.
If the temporary cap were not in place, anyone holding ‘dry shares’ – those shares held over the ‘wet share’ requirement linked to milk production – would have been able to exchange them into units in the Fund during consultation, the dairy giant added.
This could have more than doubled the size of the Fund and made the option of repurchasing it unaffordable in the context of the Co-operative’s current balance sheet targets.
Alternative Capital Structure
Fonterra’s board considered several financial models, such as a dual share structure, unshared supply structures, a traditional nominal share structure, and a split co-operative model.
After analysing various options, the board has proposed a ‘Reduced Share Standard with either No Fund or a Capped Fund’ as a preferred option.
Under this, the minimum requirement for farmer-owners would be one share for every four kgMS supplied to the co-op, compared with the current requirement of one share for every kgMS supplied.
“We believe the best option for our co-op is to move to a structure that reduces the number of shares a farmer would be required to have, and either remove the Fund or cap it from growing further, to protect farmer ownership and control,” McBride stated.
At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply, the company added.
McBride said, “This is the board’s current thinking, but we are open-minded about adjusting that direction based on farmer feedback on any of the options.
“We want to hear from as many of our farmers as possible. I strongly encourage all farmers to consider the information provided and participate in the consultation process that started today and continues over the coming months.”