Fonterra May Buy Back Shareholders’ Fund in Structural Overhaul

Fonterra Cooperative Group, the world’s biggest dairy exporter, is proposing an overhaul of its capital structure that may see its New Zealand farmer-shareholders buy back the listed Fonterra Shareholders’ Fund.

The fund, which has a market capitalization of around NZ$493 million ($356 million), would either be capped or bought back under the Fonterra board’s preferred option, the Auckland-based dairy giant said on Thursday. The company is concerned that stagnant milk supply will result in the fund becoming too large, potentially jeopardizing farmer control.

“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,” Chairman Peter McBride said in a statement. “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 removes the Fund or caps it from growing further, to protect farmer ownership and control.”

See also: Fonterra Sells Chinese Assets, Returns Focus to New Zealand Milk

The company’s approximately 10,000 farmers are currently required to hold shares in proportion to the volumes of milk they supply -- one share for every kilogram of milksolids. Surplus shares can be converted to units in the shareholders’ fund, which is also open to outside investors in order to increase liquidity. The fund tracks the cooperative’s earnings and dividend.

Fonterra said the capital structure is becoming unfit for purpose as factors such as climate change and alternative land uses lead to static or even declining milk supply. This could see more surplus shares transferred into the fund, swelling its size.

The current structure also makes it very expensive for a new farmer to become a Fonterra shareholder, prompting some to join competing dairy companies and eroding the cooperative’s market share.

Under the board’s preferred option, the minimum requirement for farmer-owners would be one share for every four kilograms of milksolids supplied. At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply, it said.

Farmers will have the chance to share their views at a series of meetings over the coming months and, if the appetite for change remains, the board will do further work to refine its preferred option. If the board decides to seek change to the capital structure, it would likely aim for a vote around the time of the annual meeting in November. It would require 75% approval to pass.

In the meantime, the cooperative is temporarily capping the size of the shareholders’ fund by suspending shares in the Fonterra Shareholders’ Market from being exchanged into units in the fund.

“If the temporary cap was not in place, anyone holding ‘dry shares’ -- those shares held in excess of the ‘wet share’ requirement linked to milk production -- would have been able to exchange them into units in the fund during consultation,” Fonterra said. “This could have more than doubled the size of the fund and made the option of buying it back unaffordable in the context of the Co-operative’s current balance sheet targets.”

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