McBride puts his stamp on Fonterra’s capital restructuring proposals

The big  dairy  co-op  Fonterra  has  moved to make  its  capital  restructuring  proposals  more  palatable  to  its  10,000  farmer-shareholders as  it  seeks to  slash  the  drastic entry  cost  to  become a  new  supplier.

Faced  with  a  future where  total milk production  is  flattening, Fonterra  needs    more  flexibility in    its  capital rules, the  most  burdensome of which has been the compulsory requirement to invest huge sums of capital just to supply.

The  revisions now   being  put  forward bear   the  stamp   of  chairman Peter  McBride, who  in an earlier role  successfully carried  the  kiwifruit  growers in   Zespri through   a  similar  capital  restructure.

McBride, after  taking  the chair at  Fonterra,  soon realised  the need for  change in the one-size-fits-all compulsory capital structure  requiring all shareholders to hold shares on a 1:1 basis. It  has become a  key factor in farmers deciding to leave.

Working  over   feedback  since  the first reform proposals were  outlined in  May,  Fonterra’s  board found several  themes emerging,  and   now sees  the need to  re-shape  several of  them. One of  the  main  worries revealed  in  the  initial  consultation related  to  the farmer-only market and its impact on the share price.

Changes being considered to the preferred option initially put forward  include adjusting the proposed minimum shareholding requirement for farmers and enabling share milkers and contract milkers to own shares.

A minimum shareholding requirement of 33% of milk supply, or one share per 3kg/MS, could be required. The preferred option had previously been 25%.

The entry timeframe for farmers to join the co-op could be extended from five to six years, while current shareholders would be given more time to exit – up to between 10 and 15 years from five years.

“It’s a good time for the board to step back and reflect on the feedback as most farmers will now be busy with calving,”  McBride says.

“Once they’ve come through this particularly busy time of the season, we’ll be ready to consult on the updated proposal.”

The  objective  of the  capital restructuring is to  ensure the   co-op stays in farmers’ hands, while making it easier to join the co-operative and scrapping the shareholders fund – which allowed non-farmers to have an exposure to the company.

The company has also placed a temporary cap on the shareholders fund, which had contributed to about $2.2bn wiped off its market capitalisation.

Fonterra said there had been 90 meetings with farmers since the consultation opened, with 5000 farmers taking part in discussions.

“The board maintains its belief that, in a flat or potentially declining milk environment, making changes early will put us in the best position to provide farmers with more flexibility while protecting farmer ownership and strengthening our co-op’s financial sustainability,” McBride said.

“We have also reconsidered voting rights in light of some feedback and at this stage our preference is for voting to continue to follow share-backed supply as it currently does,” he said.

Fonterra said it would be following up with focus groups to test different aspects of the potential changes.

“This will help us as we continue to develop a more detailed proposal to present to farmers around the time of our annual results in late September for further consultation,” McBride said.

“At this stage, we are still aiming for a farmer vote at our annual meeting, which will be held in December.”

Given   that   the  dairy  industry in the  Covid  era  has proven   again it  is  the  main  prop   of NZ’s  export  economy,  it  is  vital its  biggest  unit  gets  its  capital structure   in  a  shape  that  attracts  newcomers   and  sustains its  leadership  role  in  the  industry.

Some  critics  have argued  it  is  constrained  by   the  very  nature  of  being  a  co-operative  but  since  that  is  what  the  majority  of  its  members    want,   the  refinement  of  its  capital  structure  now  being  proposed  is  seen  as  essential.    But  it  will  call  for  all  the  skill  McBride  and  his  board  can apply  to get  the  job  done.

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