9 Dec 2021

Farmer shareholders vote in favour of Fonterra's planned revamp of capital structure

6:01 pm on 9 December 2021

Fonterra farmer shareholders have voted overwhelmingly in support of a plan to revamp the co-operative's capital structure.

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Photo: 123RF

At today's special meeting, 85.2 percent of farmers supported the changes, well above the minimum threshold of 75 percent.

The new flexible capital structure would reduce the number of shares farmers need to hold to join the co-operative from one share per kilogram of milk solids, to one share per three kilograms.

It would also allow different types of farmers to hold shares in the company, and cap the size of the associated shareholders' fund to 10 percent of all shares on issue.

The changes were aimed at securing the company's financial future and retaining farmers, amid the prospects of falling milk supply and competition from other milk processors that do not require capital investment from farmers.

Following the vote, Fonterra chair Peter McBride said it now had a strong mandate for change.

"Changing our capital structure is the most important decision we as farmers have made in almost a decade.

"The results of this year's resolutions were all above 80 percent, which shows farmers are united in their support for the direction of the co-op."

Fonterra's focus is now on delivering the strategic commitments the business has made, he said.

With the vote passed, the co-operative now needs to get the government on board to amend the Dairy Industry Restructuring Act (DIRA) to approve the changes, which is the special legislation that enabled the formation of the company back in 2001.

When Fonterra was formed in 2001, special legislation (DIRA) was passed to allow the country's two biggest co-operatives at the time, New Zealand Dairy Group and Kiwi Co-operative Dairies, along with the marketing and export agent the New Zealand Dairy Board, to merge.

In a letter to Fonterra's chair in November, Agriculture Minister Damien O'Connor expressed reservations about the proposal, saying he was not sure the proposal would deliver the best long-term outcomes for farmers or the dairy industry.

He said he was particularly concerned that the current proposal risked creating diverging shareholders' interests between farmers with small shareholdings against those with larger ones.

"At this stage, it would be difficult for the government to support an amendment to DIRA to facilitate the proposals," O'Connor said.

Following the vote, McBride said Fonterra would continue to work with the government on how the new capital structure will be given effect under DIRA.

"I believe we are philosophically aligned with the government and remain confident that we can find a regulatory framework that supports the flexible shareholding structure.

"The strong mandate we received today will support our conversations with the government as we continue to work together to find a mutually acceptable outcome."

The co-operative was aiming to implement the changes as soon as possible from the beginning of the next milk season.

'Missed opportunity'

The chair of Fonterra's associated shareholder's fund, John Shewan, said the outcome of the vote was a "mixed blessing".

"The bottom line is the Fonterra board and manangement are saying that these changes will make Fonterra a much more successful business, and that's obviously potentially good for investors in the non-voting units with the shareholder's fund.

"On the other hand, in my view the proposals don't go far enough and I think there is a missed opportunity here."

The shareholder's fund exists to provide farmers with a liquid market to sell their excess shares in year' when milk production falls to free up capital.

These shares are converted into non-voting units and it is the only way that non-farmers can invest in the co-operative.

Fonterra wanted to cap the size of the fund because it was concerned that the size of the fund would balloon in the future, as milk production was forecast to fall, which could threaten farmer's grip on the co-operative - this was depsite unit holders having no bearing on the co-operative's management.

Shewan said he felt the company should have bought out the fund at a fair value for unit holders.

"Fonterra said very clearly today they are either a corporate or a co-operative, and you can't have a foot in both camps.

"They decided today with a very strong mandate from farmers to go the to the co-operative camp and I absolutely respect and understand that but I think that is inconsitent with retaining the fund."

Regretably the capital restructuring had resulted in the value of units falling 20 percent since the consultation started, Shewan said.

However, Shewan said there was an opportunity for unit holders to recover lost value if Fonterra continued to build on the recent success it had had in the past two financial years.

Farmer 'thrilled' with result

Winton farmer and Fonterra shareholder John Kennedy voted for the change.

"I think Fonterra had to look after its existing shareholders and to look to the future, obviously there's a lot of competition out there and we need to be prepared for the challenges that are arising.

"I'm obviously thrilled with the result, I was quite surprised about the turnout - it's a really good indication of what most farmers were thinking."

The co-op's share price dropped when it began consulting on its plan in early May - the price then was $4.56 but is now hovering around $3.14 - raising concerns among older farmers who want to cash in their shares and retire soon.

But Kennedy said the vote gives him some peace of mind that the co-op is heading in the right direction.

"Well, I guess I'm in that age bracket but I have no intention of selling, I do feel for somebody who perhaps is getting out in the short term but look, at the end of the day, Fonterra's performance is good, the shares are returning above the cost of interest and I think they will lift a little bit.

"The reality is for the good of the company this change is required. It's great that it will be easier for younger farmers to get involved in the co-op I think that's really critical."

Federated Farmers national sharemilkers chairperson Aaron Passey also welcomed the result.

"I've been hearing mixed reviews but it's a pretty strong mandate, anything that helps sharemilkers and contract milkers get ahead is a good thing, I'll definitely consider getting involved now, yeah."

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