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Too soon for Fonterra capital structure review, shareholders say

Wednesday 4th September 2019

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Fonterra Cooperative Group is reviewing its capital structure but some shareholders argue it’s too soon given the challenges the group is facing.

“It is far too early for the company to be considering," major shareholder Colin Armer said. "They have a pile of stuff they’ve got to get sorted out and capital structure is just a distraction.” 

A Fonterra spokesperson confirmed a sub-committee has been set up to "review the capital structure” but offered no further detail on who is on the committee, its brief, or when it might report.

“I think the capital structure is a distraction the company does not need," Armer told BusinessDesk. "They should sort their ship out and come back and talk to us in a couple of years’ time.” 

The review comes as the cooperative is looking at every aspect of the business after reporting its first loss last year and signalling another loss for the year ended July. It will report its annual result next week.

Federated Farmer vice president Andrew Hoggard also said the capital structure isn’t top of the list.

“What’s the strategy? Last time they told us `strategy drives structure,' or something like that. So, purpose and strategy are what we need to understand first before tinkering with the structure,” he said.

Jarden analyst Arie Dekker said he expects the capital structure review to cover off on the sources of capital available to Fonterra but he doesn’t expect the cooperative to deviate from the approach that favours a mix of debt and farmer-controlled equity.

“If that approach is retained then the important thing will be to ensure that the funding structure can sustain the strategy and align with farmer requirements and expectations from their co-operative – including on financial risk,” he said.

He noted that Fonterra likely needs to confront the fact that if farmers want to limit the amount of equity capital they have in Fonterra it will need to maintain a narrower focus on the core business of processing and selling New Zealand milk.

Dekker said the dairy giant may be getting to the point where it is open about the fact that its competitive positioning has been weakened by farmers contributing more equity than required for the core business while also taking on too much debt to “support activities which have destroyed value and have been over and above what is required to process and sell New Zealand milk – something Fonterra does effectively,” he said.

He also expects the future of the Fonterra Shareholders’ Fund to be considered. While the fund did increase the borrowing capacity of Fonterra - by reducing redemption risk - it was not established as a means of providing access to outside equity capital, but rather as a potential future gateway to doing so.

“Subsequent performance has likely all but closed that door and rather than strengthen and de-risk the cooperative, the fund has essentially provided the means to increase the level of debt,” he said.

As a result, “Fonterra might ultimately move to unwind the fund.”  

Both the fund units and shares owned by farmers have seen their value eroded, in particular after Fonterra reported its first loss last year. 

The units last traded down 0.9 percent at $3.27 and are down 29 percent so far this year. The price set for the units in 2012 was $5.50 and they closed at $6.85 on the first day of trading. Farmer-owned Fonterra shares are also down 0.9 percent at $3.27 and have shed 29 percent so far this year.

John Shewan, chair of the Fonterra Shareholders’ Fund said the fund isn’t directly involved in the strategic review and said he had no insight on whether it could result in changes to the fund. 

“Clearly the returns are unacceptable and I don’t think anyone, including Fonterra, disagrees with that and that’s what we are focusing on improving.”

Fonterra is expected to report a full-year loss of $590-675 million next week after writing down assets in Brazil, China, New Zealand and Australia.


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