Fonterra unit fund manager reports to market on capital structure proposal

Fonterra farmer-shareholder support seems mixed on whether they’d prefer the listed shareholders’ fund to be bought back by the big dairy company or continue with a permanent size cap.

This is the advice of Fonterra Shareholders’ Fund chairman John Shewan to the market today following a confidential meeting between Fonterra leaders and the fund’s management board.

Fonterra directors are proposing the fund, which offers non-voting, dividend-carrying units to the public, be scrapped through a buyback by the company, or capped, as part of a proposed capital restructure.

Shewan’s notice said the fund manager had retained specialist corporate finance advisor Simmons Corporate Finance and lawyers Chapman Tripp to assist its consideration of the impact of Fonterra’s proposals on the fund, and its unitholders.

The price of Fonterra farmer-only traded shares as well as units have dipped after the announcement of Fonterra’s capital structure shakeup proposal on May 6. Before the announcement they were closely aligned.

The fund manager noted both share prices had fallen “materially” and that trading conditions continued to be volatile.

It also noted Fonterra’s chairman Peter McBride had said at the time of the change proposal announcement that it was expected it to impact the price of shares and that there may not be as much liquidity in the market.

One large Fonterra shareholder, Hopkins Farming Group, claiming nearly $3 billion has been wiped off the value of farmers’ balance sheets in the aftermath, plans to try to call a special shareholders’ meeting to demand the resignation of McBride and some directors, and said it intends to make a formal complaint to the Financial Markets Authority this week.

While Fonterra leaders consult with farmer-shareholders – a process set to continue to later this year – the company imposed a temporary cap on the size of the fund by suspending farmer shares in the separate farmer-only share trading market from being exchanged into units.

The fund’s market capitalisation today is $400.5m. Trading is very thin at $3.73 per share.

The fund has 107.6 million shares on issue. In March the securities were trading just above$5.There was a large fall in price around June 20, from $4 to $3.65. However, today’s price is 3c higher than a year ago.

Shares in the farmer-only market, the Fonterra Shareholders’ Market are at $3.25 today.

Today’s notice from the fund said the manager had no role in the capping decision, and could give unitholders no assurance about the price or liquidity of trading in the fund, as it had no control over these matters.

Fonterra shares can only be owned by farmers who must buy them to supply milk to the cooperative, New Zealand’s biggest business.

The notice said the fund manager’s role is to manage compliance with regulatory requirements and ensure unit holders’ interests are managed in accordance with constituent documents underpinning the fund, which was introduced in 2012 after a capital restructure by Fonterra.

“The manager reiterates that Fonterra’s consultation process (with its farmers) is expected to take several months. Detailed aspects of the proposal remain fluid with farmers expressing a range of views …

“Farmer support seems mixed on Fonterra’s consultation on whether farmers would prefer the fund to be bought back, or continue with a permanent cap.”

Removing the fund would mean Fonterra making an offer to unitholders to back buy their shares at a fixed price, said the notice.

The approval of at least 75 per cent of unitholders would be needed for the offer to be accepted.

Fonterra’s consultation documents on the capital restructure proposal say any fund buyback offer amount “would need to be acceptable to unitholders, fair to farmers and would need to make more sense to the co-op than the capped fund alternative”.

“If there are indications of sufficient farmer support for a refined proposal, Fonterra aims for it to be voted on by…shareholders at their annual meeting…at the end of the year. The annual meeting of unitholders of the fund is likely to be held a few days later,” said the notice.

The first stage of Fonterra’s consultation with farmers winds up this week.

Findings and feedback will be consolidated and Fonterra chairman McBride has indicated some changes to the proposal are likely.

A change in the capital structure would also require Government support for changes to the dairy industry legislation, Dira.

The notice said a buyback of the fund would therefore need a price to be negotiated between the fund manager and Fonterra, the manager to make a recommendation to unitholders, and the approval of 75 per cent of unitholders voting.

No buyback would be completed until Dira amendments were passed.

The fund manager would continue to monitor the situation and consult its advisers in the coming months.

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