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Fonterra pushes on with capital restructure, despite government concerns with proposal

Giant New Zealand dairy co-operative Fonterra is pushing ahead with a capital restructure proposal despite not gaining support for it from the New Zealand government.

The changes include placing a cap on the listed Fonterra Shareholders’ Fund, which is open to investors in Australia, including non-farmer shareholders.

The proposal would see its NZ farmer suppliers required to hold a reduced minimum of one share for every three kilograms of milk solids they produce and allows for additional farmer classes, including sharemilkers, to hold shares in the co-op.

But the NZ government has not backed the proposal, which will require changes to the Dairy Industry Restructuring Act (DIRA), under which Fonterra was formed.

Fonterra released the government’s advice in details about the proposal sent to NZ farmer shareholders on Wednesday, two days before voting starts on November 19.

In the letter, Agriculture Minister Damien O’Connor said “it would be difficult for the government to support an amendment to DIRA to facilitate the proposals”.

“The current proposals envisage a legislative change to remove key mechanisms that risk weakening performance incentives on Fonterra,” he said.

“Without alternative measures, I am not yet assured that these proposals would deliver the best long-term outcomes for farmers or the dairy sector as a whole.”

Mr O’Connor said he was concerned the proposal would create division between farmers with minimum shareholdings to supply milk and those with larger shareholdings for investment.

“My concern is that this could result in competing shareholder priorities relating to Fonterra’s future direction and strategy,” he said.

Bur Mr O’Connor said the government acknowledged a successful and innovative Fonterra was central to a well-functioning dairy industry, which was vital to the NZ economy.

“Ensuring that Fonterra operates as a strong, intergenerational, farmer-owned dairy processor is therefore important for the New Zealand dairy industry’s future,” he said.

Mr O’Connor said he was prepared to consider an alternative, more balanced proposal from Fonterra.

Fonterra remains confident it can get the government on side.

Fonterra chair Peter McBride said he had spoken with the minister and was confident that it could provide the necessary assurances and work with the government to find a regulatory framework to support the new structure.

He urged farmers to exercise their vote.

“This is one of the most profound decisions we will make as farmers,” he said.

“There is no perfect answer, but we are confident that the flexible shareholding structure will support the sustainable supply of NZ milk that our long-term strategy relies on.

“One enables the other, and together they give our co-op the potential to deliver the competitive returns that will continue to support our families’ livelihoods from this generation to the next.”

READ MORE: The future of Fonterra in Australia

Fonterra plans to hold a special meeting to vote on the proposal, which requires a minimum 75 per cent support from votes cast, following its annual meeting on December 9.

The proposal has already passed one hurdle – the requirement of a 50pc support vote by the Fonterra Co-operative Council, the representative body elected by farmers to represent their interests.

The council voted 92pc in support of the recommended changes.

READ MORE: Chunk of Fonterra Australia may hit the market

But the proposal has disappointed the Fonterra Shareholders’ Fund, which wanted Fonterra to buy back the fund, in part, due to its poor performance.

Units in the fund have fallen almost 30pc since it was launched in 2012.

Unit holders in the fund are not able to vote on the proposed changes as they are not Fonterra shareholders.

The co-op is aiming for a June 1, 2022, start date.

Changes to initial proposal

Fonterra has made changes to the proposals, first floated in May and detailed in September, in response to feedback from farmer shareholders and the shareholders’ fund.

Mr McBride said the decision to go ahead had been informed by a significant volume of shareholder feedback that showed strong support for the changes.

“Our strategy is focused on New Zealand milk, and our future success relies on our ability to maintain a sustainable milk supply in an increasingly competitive environment and one that is changing rapidly due to factors such as environmental pressures, new regulations and alternative land uses,” he said.

“We see total New Zealand milk supply as likely to decline or flat at best.

“Our share of that decline depends on the actions we take with our capital structure, performance, productivity and sustainability.

“If we do nothing, we are likely to see around 12-20pc decline by 2030 based on the scenarios we have modelled.”

Mr McBride said changes made from the proposals outlined in September included:

  • The introduction of thresholds to support the alignment of share ownership and milk supply. These would reflect Fonterra’s intention that the total number of shares on issue in the co-op would be within +/-15pc of total milk supply, and that the proportion of shares held by ceased suppliers would be less than 25pc of the shares in the co-op.
  • The way dry shares would be allocated to associated shareholders (sharemilkers, contract milkers and farm lessors) had been simplified to make it easier for them to apply to hold dry shares.
  • The overall limit on the size of the Fonterra Shareholders’ Fund had been reduced from 20pc to 10pc of total shares on issue, rather than having a total ban on any further shares being exchanged into units. This recognised that the fund size, which was currently around 6.7pc of total shares on issue, could change from time to time subject to the overall limit. Shares would still not be able to be exchanged into units on a day-to-day basis, and the board would retain its current rights to regulate this process.


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