As its roadshow gets underway, Fonterra’s stellar results will only complicate the issue, writes Hugh Stringleman.
Fonterra’s interim results, to be released on March 20, will have a big influence on the planned divestment of its consumer businesses, now named Mainland Group.
Prosperity confirmed may encourage prospective purchasers of Mainland, but the divisional breakdown may alternatively leave suitors discouraged.
Farmer-shareholders, many of whom are already strongly for or against divestment, need the detailed information in the divestment roadshow presentation.
They will also have, in all likelihood, the best set of interim earnings Fonterra has ever achieved.
Farmers will be as interested in the details as potential Mainland bidders.
The argument for retention of Mainland must be strengthened by the biggest-ever farmgate milk price forecast AND a mid-point dividend prospect of around 50c.
Why sell an arm when the body is doing so well?
But the counter argument hinges on that over-used phrase “added value”, and Fonterra’s ability to consistently deliver both a top milk price and record earnings.
It used to be that a high milk price and high AV earnings were antithetical.
That still carries logic, because AV products are made from ingredients that the main body of Fonterra sells to its consumer arms around the world, at home, in Australia, southeast Asia, Sri Lanka, the Middle East and Africa.
As commodity prices rise, the gross margins on dairy consumer products shrink.
The task of Mainland’s acting chief executive, René Dedoncker, is to demonstrate that is not necessarily so, just that Fonterra is not the optimum owner.
Nevertheless, farmers will see the gaps between $10/kg milksolids at the farmgate, $13/kg wholesale for butter and $10/500g retail and ask “Why shouldn’t we continue to own chunks of that?”
When Fonterra was first proposed in the late 1990s, the growth in dairy consumer products was forecast to drive up revenue to $30 billion annually.
Only this financial year will Fonterra’s revenue come close to that mystical $30bn, a number now that is nothing like it would have been 25 years ago.
When former chair Sir Henry van der Heyden proposed an A and B company split in 2007, more than half of turnover was assumed to come from added value.
Farmers voted against him and almost two decades later some version of A/B will again be put before shareholders.
An initial public offering with preference to Fonterra shareholders is included in considerations.
Mainland has reportedly attracted much interest from Australian dairy companies and private funds in advance of Dedoncker’s roadshow for potential investor groups.
Fonterra has decided to retain a manufacturing facility in Saudi Arabia and its Greater China consumer business, refinements that have dropped Mainland’s net revenue in FY24 to just under $5bn.
Added value earnings are around $200 million, about one-eighth of the company’s total.
Return on capital of 7% for consumer businesses is well below those of ingredients (10%) and foodservice (20%).
Farmer-shareholders have been tempted with $1 a share capital return, or more, should Mainland be sold.
Share prices have doubled over the past 12 months in anticipation, along with the gross dividend yield of 12% in FY24.
An abundance of financial information will provide guidance but the decision boils down to influence and control.
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