Fonterra proposes new capital structure with farmers owning more shares (Update 1)

Fonterra has proposed capital reforms that would enable farmers to buy shares covering up to 120% of their production and be able eventually to trade these 'dry' shares with each other. (Updated with comments from Fonterra Chairman Henry van der Heyden and CEO Andrew Ferrier, plus details). Currently farmers have to own 10 Fonterra shares for each 10 kilograms of milk solids produced, which creates a 'redemption' risk where farmers can pull equity out of the cooperative during a drought year or when they choose to produce less. The proposal means farmers could own up to 12 shares for each 10 kilograms, including 2 'dry' shares without voting rights, but with the right to earn the 'value added return' on each of those 'dry' shares. The value of the shares would be 'restricted' at its current level of NZ$4.52 for a couple of years. Fonterra's 11,000 farmers currently own shares worth NZ$4.392 billion. If they were all able and/or willing to take up their 20% of dry shares this would inject NZ$878 million of fresh equity. Fonterra is currently forecasting a value added return of 55 cents per share in the current season, implying a 12.1% yield on the NZ$4.52 share price.

Fonterra announced a three step process to bring in the capital structure. The three steps include: 1. Strengthening the share structure, which means asking farmers to buy up to an extra 20% of shares to bolster Fonterra's balance sheet by reducing debt and providing capital for growth. Fonterra did not immediately say how much it expected to raise. This proposal would be put to shareholders at the AGM on November 18. 2. Restricted share value, which means the fair value share price would be restricted at NZ$4.52 for a couple of years. Fonterra said the actual value of the shares would be 10-30% lower than that initially before the value 'caught' up within a couple of years. This would also be voted on at the November 18 meeting. 3. Trading among farmers, where farmers would be able to trade their shares with each other. This part of the proposal would not be voted on until next year. Fonterra Chairman Henry van der Heyden said this capital reform would provide Fonterra's capital needs for the next 5 years or so. Options after that included increasing the number of dry shares or retaining capital from the payout, he said. Fonterra announced earlier this month it would not list on the NZX and would ensure 100% farmer control. CEO Andrew Ferrier did not disclose how much capital would need to be raised to reduce Fonterra's debt to equity ratio to below 50%, although he said Fonterra's debt levels were close to that level. Shareholders Council Chairman Blue Read said the council unanimously supported the proposal. Van der Heyden said Fonterra had no clear idea of how many farmers would take up their full 20% allotment of shares. Read said about 10% of shareholders were so cash constrained they would be unable to take up the offer, while another 20-30% would struggle to find the money easily. Van der Heyden said he did not think Fonterra would be held hostage by the banks lending the money to farmers to buy more shares.