At the annual meeting of the fund on Monday, Shewan said he was disappointed an initial proposal for Fonterra to buy the fund back did not proceed, with the dairy giant instead favouring retaining the fund and capping its size.
At the annual meeting of the fund on Monday, Shewan said he was disappointed an initial proposal for Fonterra to buy the fund back did not proceed, with the dairy giant instead favouring retaining the fund and capping its size.
Fonterra is overhauling its capital structure as it eyes a future where milk supply is expected to flatline or decline and as it tries to stem the loss of farmer suppliers to rivals who don’t require them to outlay cash for shares. Last week, its farmers voted in favour of changes that would bring in a more flexible shareholding structure for farmers, restrict their ability to trade shares for units, and limit the size of the NZX fund to ensure farmer control of the co-operative in the future.
“The key rationale for the fund being set up in the first place back in 2012, being the provision of a stable capital base through the removal of redemption risk, is no longer relevant because of course farmers can no longer redeem their shares,” Shewan told the meeting.
“In short, the fund has run its course. The capital structure review provides a natural break point in the life cycle of the fund.”
“I agree,” Shewan said. “That is why I believe the fund should be bought out.”
The fund accounts for about 6.7 per cent of Fonterra’s total shares, and farmers agreed to restrict the size to 10 per cent of total shares, from 20 per cent.
Shewan said he was “very concerned” at the impact the proposed changes to the capital structure have had on the fund’s unit price during the consultation period.
The consultation, announced in May, had created significant uncertainty for unit holders and potential investors and had a significant adverse impact on the unit price, he said.
The units had been trading at $4.60 before Fonterra announced its review in May, and they recently traded on Monday at $3.85. That’s seen about $80 million wiped off the value of the fund, reducing it to about $414m.
“We remain of the view that Fonterra should have proceeded with its initial preference to make an offer to unit holders to buy the fund back at fair price,” Shewan said. “We think that was the fair, right and proper course of action to take. We regret that this action was not taken.”
Still, Shewan noted that Fonterra’s belief that the changes would help the co-operative be much more successful was positive for both its shareholders and unit holders, who all stood to benefit.
The reduced capital requirement for farmers would see many focus more on dividends and share value, which meant their interest would be more aligned with unit holders, he said.
Shewan also welcomed Fonterra’s positive outlook for earnings.
“If these targets are achieved, then the substantially sub-par financial returns that unit holders have experienced should improve markedly,” he said.
Fonterra’s McBride acknowledged that the dairy company had not met expectations in the past for return on capital invested, for either farmers or unit holders.
Under the new flexible shareholding structure, farmers would have greater choice about their level of investment in Fonterra, which would increase the constructive tension for the co-operative to deliver a competitive return on invested capital as well as strong milk prices, he said.
Having made the decision to retain the fund, Fonterra’s board was committed to ensuring its strong performance, he said.
The changes have yet to be approved by the Government, and Fonterra aims to implement them next season.
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