Northington Partners analysis highlights share largesse from sale of co-op’s consumer brands.
Fonterra could return up to $3 billion to its farmers from a full exit of its consumer brands and businesses, Northington Partners says.
While the capital return to shareholders could be influenced by seasonal working capital requirements and capital expenditure, a potential return of $2 a share is material for the share price.
In the past year Fonterra supply shares (FCG) have doubled in price, from $2 to $4.30 currently, partly in anticipation of a capital return.
Fonterra Shareholder Fund (FSF) units have walked a similar climb, from $3 to approximately $5.
Northington said the potential value of consumer “in-scope” businesses is highly uncertain until offers are received but the book value of $3.4bn represents 12 times earnings before interest and tax (EBIT).
“Comparable consumer dairy businesses broadly trade at enterprise values of 14 times,” Northington says in its annual report to the Fonterra Co-operative Council.
“It is possible that Fonterra may divest some or all the in-scope businesses or may decide to retain a shareholding.
“In addition, ongoing milk supply arrangements or other transaction terms may impact on value.”
Fonterra said an update on the divestment process can be expected at the annual meeting in Taranaki on Thursday, November 14.
Northington listed the details required, such as transaction structure and value, use of sale proceeds, impact for brands, manufacturing and people, and the ongoing relationships with purchasers.
“The high-level rationale for the potential exit of the Consumer and related businesses appears reasonable when viewed from a financial performance perspective,” the report says.
Capital employed by the in-scope businesses is $3.4bn or 30% of Fonterra’s total, while their contribution is 14% of sales volumes.
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