The Fonterra capital restructure was overwhelmingly supported by farmers, the only legal owners of Fonterra shares at a meeting last week, with 82.7% of eligible votes cast and 85.2% voting in favour.
Fonterra Shareholders’ Fund chair John Shewan is again calling for the co-operative to buy out the unitholders because the planned capital restructure has destroyed the fund’s purpose.
“We felt that the reasoning Fonterra set out in support of its new capital structure showed clearly that 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 fund’s annual meeting.
“In short, the fund has run its course. The capital structure review provides a natural breakpoint in the life of the fund,” he said.
The restructure, which requires a law change before it can be implemented, was overwhelmingly supported by farmers, the only legal owners of Fonterra shares, at a meeting last week, with 82.7% of eligible votes cast and 85.2% voting in favour.
Under the restructure, the fund, currently 6.7% of Fonterra’s capital base, will be capped at 10%, down from 20% previously, although farmers will no longer be able to convert their shares to units in the fund.
It will also mean that instead of having to hold one share per kilo of milksolids a farmer produces, they will only need one share for every three kilos of production.
Shewan noted that the fund’s units were issued at $5.50 when it was created in 2012.
The announcement of the restructure caused the units to fall from $4.60 on May 5 to $3.85 on Friday and the return to unitholders since the fund was created in 2012 has been just 0.3% a year.
“That’s not on,” Shewan said.
While Fonterra’s management is promising a better performance in future, “history shows how hard this is going to be. Returns have been very poor”.
However, Shewan dismissed a question from a unitholder on whether Fonterra was ethically and morally bound to buy out the unitholders.
“I don’t think it’s a question of morals or ethics,” he said, adding that the risks of unitholders’ interests and farmers’ interests diverging were outlined in the prospectus, although hindsight showed more emphasis might have been put on the strategic risk.
The history of the fund showed “it’s an uncomfortable coexistence” and that now “the core rationale for the fund has gone.
“My question and my challenge to Fonterra is what’s its purpose?” he asked.
Fonterra chief financial officer Marc Rivers says the consultation with farmers ahead of last week’s vote showed they wanted to retain the fund.
“The transparency that comes from having the fund and the scrutiny that comes with that is clearly a positive for all investors, including the farmer shareholders,” Rivers said.
He accepted Shewan’s comment that the gap that has opened up between the units and the share price is likely to persist, not least because the pool of investors that can trade in the shares – farmers only – is so much smaller than for the units, which anybody can own.
Shewan noted that the restructuring proposals “attach significant weight to the critical importance to farmers of protection of farmer ownership and control”.
“Even the relatively small size of the fund “is a cause of significant concern. This really goes to the heart of the issue of whether Fonterra is a corporate or a co-operative, which (Fonterra chair) Peter McBride addressed directly at last week’s AGM”, Shewan said.
“He said that the current model where Fonterra is trying to have a foot in both camps is not sustainable. I agree and that is why I believe the fund should be bought out.”
Shewan says allowing the fund to continue “perpetuates the perception in the minds of investors of potential conflicts between the interests of farmers and the interests of unitholders”.
Farmers tend to focus mostly on the milk price, but the higher the milk price, the higher Fonterra’s input costs and therefore the lower its earnings.
Shewan also touched on the inherent contradiction of the restructuring plan.
“As a result of the reduced capital requirement on farmers, there will now be a much greater number of farmer and retiring farmer shareholders in Fonterra who, like unitholders, will be focusing solely on dividends and share value,” he said.
