Cracking cooperatives

By Andrea Fox

Thursday 1st July 2004

It's enough to make a capitalist weep. Cooperatives, those mysterious, closed shops that shut out the capital investor (because they're in it for their own people and proud of it) generate $24 billion a year - a massive 22% of our GDP.

But if you listen very carefully, you might hear rustling in this money mountain. It will be the sound of dollars moving out from these cordoned-off patches of the economy into the spotlight of the sharemarket. The sound of cooperative companies sniffing out new riches. Try to contain your excitement.

But if co-ops - which include such notables as Fonterra and Foodstuffs - power this much of the economy, and if some of them are listing (or even thinking of listing) on the stock exchange, it could be a big deal.

Chances are the April listing of the co-op Livestock Improvement Corporation on the NZAX, the alternative stock exchange, passed you by. Yet this was a historic moment. The livestock genetics and cattle breeding company (annual revenue $92 million) was the first of New Zealand's hefty collection of agricultural cooperatives to list. Kiwifruit and avocado co-op Satara is likely to be next, later this year. And of course it is NZX's great hope that this may lead the mighty Fonterra, New Zealand's biggest company with annual revenue of $12.4 billion, to abandon its fear of loss of farmer control of its business and jump in among the capitalists too.

Now that would make a big splash. Chances are you'd really sit up and take notice then. And who knows, it could eventually lead to a few of the other big names on the land - think fertiliser kings Ravensdown ($469 million annual revenue) and Ballance ($350 million); dairy company Tatua ($115 million); meat company PPCS ($1.4 billion); kiwifruit company Zespri ($869 million) - to follow suit.

New Zealand has a lot of agricultural cooperatives because it's an agrarian economy and cooperatives were established to serve the needs of farmers. But there are many cooperatives in the cities too - Interflora, Plumbing World, PSIS, Motor Trade Finance and Sportsworld, to name a few. The New Zealand Cooperative Association has 46 on its books.

All that money, going round and round between so few people. No wonder stock exchange boss Mark Weldon got all starry eyed at the listing of LIC and is salivating at the prospect of Satara joining the board. He believes economic growth would get a big push if our agricultural co-ops freed up their capital structures. But two doesn't make a trend, and it would be wrong to suggest even half of New Zealand's cooperatives may one day list. For some, the idea would be repugnant and against the spirit of their founders' wishes.

And it's wrong to imply that we'd all be in for a bonanza if and when some of the biggies take it into their collective heads to list. We might not even be invited to buy a share. Hamilton-based LIC, for example, is only looking after the pockets of its own 12,000 farmer shareholders with its listing. Its listed "investor" shares are only tradable between its farmers, and farmers also own another swathe of co-op ("control") shares that aren't listed at all. That may change, but not any time soon, says chief executive Stuart Gordon.

But Bay of Plenty-based Satara, which has yet to get the green light from its 280 growers to list, will allow non-growers to buy into the company - albeit only part of it. Sixty per cent of the company will still be controlled by growers holding cooperative shares. The shares that may be listed in October or November will be tradable investor shares.

This is also likely to be the model Fonterra adopts - if it ever makes the leap. Chairman Henry van der Heyden won't even discuss the possibility. But it is no secret that van der Heyden and his board of mainly farmer directors have been sweating over what to do about Fonterra's capital structure for many months. A likely candidate for a listing, albeit probably restricted, is Fonterra's value-added fast moving consumer goods business, New Zealand Milk. When might the Fonterra board be ready to make a decision to take to their shareholders? Don't even ask. It's too sensitive. Meantime, Fonterra's only taste of the sharemarket is through its capital notes listing.

Control freaks
Analyst Brian Gaynor reckons agriculture is under-represented on the sharemarket, and says LIC's listing is the start of "a kind of gentle step into the corporate world for the farming community". But farmers tend to fear loss of control over their companies.

"There's a real fear about corporate ownership and outsiders. But if it's done in a way where you have shares that are non-tradeable - and there's Satara with its two types of shares - farmers will probably realise this isn't too bad after all. With Satara, they may see the investor shares performing quite well and say, 'why can't my shares in the co-op be traded as well?'. "

Gaynor recalls that in Ireland, dairy cooperatives listed on the stock exchange amid huge opposition from the farming community. The shares couldn't be bought by outsiders, but after a while farmers began to realise their scrip had done well - enough to buy a new car or tractor. They went back to their cooperatives and lobbied for equal treatment of all the shares and an end to the cooperative structure.

"That took a few years, but I think you'll find if those companies perform reasonably well, some kind of similar development could happen here," Gaynor says.

It ain't for everyone
Foodstuffs (Auckland) managing director Tony Carter, speaking for the three cooperative Foodstuffs grocery businesses around the country, sees no benefit at all in listing. But what of the argument - espoused by Weldon, among others - that listing big cooperatives such as Foodstuffs would unlock value for the economy? "It's something we would only consider in our interests, not in the interests of the general economy. We take a very selfish view point on that, as should anybody."

Listing would "fix" value, rather than unlock it, Carter believes. "We believe we are essentially almost trustees for future generations [of grocer members]. If you fix [value] at a point in time you give a benefit to one generation that penalises future generations."

Cooperatives association executive director Ian Reed points out different co-ops have different goals, and can't be lumped together. Many simply seek to maximise returns and the delivery of goods and services to their members. Reed outlines a basic principle of cooperativism that will ensure a good chunk of its disciples will never be seduced into listing: "The cooperative framework, with its democratic structure, means people have a say even though they may be a modest participant. If you are a low-level investor in a company, the amount of say you have will be neglible, if not nil."

Arguing the case
Brent King, boss at listed financial services company Dorchester Pacific, is watching the situation with interest. He reckons it would be better if trading in LIC shares wasn't restricted, but then it's better LIC is listed than unlisted.

Controls on share trading could be enforced "forever" as long as shareholders are happy with the situation, King says. What really matters is the company's performance. "It's clear what these guys have to do and they'll get damn good signals if they're not doing it. Their share price will drop and people will talk about them in the newspapers."

There is a strong economic case for more cooperatives listing, he believes, if only to get greater transparency and provide more opportunities for non-farmers to invest in one of New Zealand's most important sectors.

Oh yeah? Rick Bettle, vice president of the Institute of Directors, a former chief executive of meat cooperative Alliance who's also headed investor companies and law firm Kensington Swan, disputes the argument that the corporate style of a public company results in better management and accountability. A well-managed cooperative can be every bit as successful as a well-managed company, he says, "The difference comes down simply to management and the board. It's nothing to do with structure." As to whether listing of cooperatives would unlock economic value, Bettle says you could argue the value was already there. "Or do they mean [enabling] someone else to get their hands on more of it?" he wonders.

"If (a company) is well governed and well managed, then it will create a lot of value for its shareholders," says Bettle. "I also think the stock exchange has done a great job of getting some interest back into the market. But when it comes to the question, should all cooperatives convert tomorrow simply because it is a better form, there's no evidence to support that."

Canterbury University senior accounting lecturer Alan Robb is a big fan of strong cooperatives. While the listing of Fonterra and Motor Trade Finance's capital notes is without question a good thing for the co-ops and their note holders, Robb says he has yet to see a convincing case of the benefits of listing co-op shares. "All the evidence I have seen suggests that those who really benefit are sharebrokers, investment advisors and consultants or senior managers who are personally enriched at the expense of members."

Robb says there are several reasons why co-ops are likely to perform better unlisted: there are no share price distractions for management, and no need for the creative accounting that can be induced when executive bonuses are linked to sharemarket performance. Unlocking value can be a euphemism for asset stripping, he says. Co-ops can be as profit-focused as any other business, but take a longer term view to protect the organisation from "predators".

NZX markets development manager Geoff Brown, not surprisingly, disagrees. "What underlies the share price is a company's ability to create profitable opportunities and to grow. If a company is doing that the share price will look after itself."

Not that Brown is bagging cooperatives. They haven't existed successfully for so many years without good reason, he says. It's just that the NZAX is keen to get them on board.

As the first in what Brown hopes will be a steady trickle of co-ops to come out of the shadows, LIC's Gordon is certainly enthusiastic about what his company has achieved post-listing. LIC had a capital worth of $80 million, but only $3 million of that was issued to its shareholders - the farmers who used its services. The money was issued on the traditional cooperative dollar in-dollar out share basis (under the classic co-op share structure, the value of the share doesn't alter over time - a shareholder with a $1 share will only get $1 for that share if he leaves the co-op). Post listing, the investor shares reached $1.86, and have since settled back to around $1.44. That gives a market capitalisation of around $44 million - a useful figure to be able to put in front of bankers in support of its international growth plans. And LIC's capital value is now reflected on its shareholders' balance sheets.

Gordon's also upbeat about listing's challenge to management. "You have transparency of value because it is listed, and you have price discovery. So of course you now have management required to perform based on the market expectations of capital investors."

The dollar in-dollar out system did raise issues of transparency and performance, and fostered the idea of "free capital", Gordon says. "But it's not free capital, it's real money invested by people who quite deservedly should get a return on that money."

Satara chairman Andrew Fenton also expects listing to drive the business harder. Cooperatives haven't traditionally needed to be accountable to anyone other than those who own their closely held shares. "I think that now with the NZAX rules and the requirement for accountability to the public it will make the business a lot more sharply focused. That's good and healthy."

It's enough to make a co-operativist weep.

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