After two steps, Fonterra's leap awaited

STACY SQUIRES/The Press

BIG PICTURE: Fonterra chief executive Andrew Ferrier talks to shareholders at the dairy co-operative's annual meeting in Ashburton yesterday.

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The curtain-raiser for a market listing of Fonterra shares – or a display of co-operative shareholder power that has checked the ambitions of directors of New Zealand's biggest company until its farmer-owners are ready for change?

That's the big question after Fonterra shareholders yesterday ushered in two steps of a three-stage capital structure reform plan at their annual meeting.

Fonterra directors, who have worked behind closed doors with the Fonterra Shareholders' Council for a year to find a capital reform proposal acceptable to the watchdog, needed 75 per cent support on each of the two steps. They comfortably got 89 per cent on each.

As a result, they can offer Fonterra's 10,500 shareholders the opportunity from next month to buy 20 per cent more shares not linked to milk production, opening Fonterra's capital-starved coffers for a potential injection of up to $900 million a year.

Approval for step two means Fonterra shares, now valued as though they are market tradeable, can be independently revalued to properly reflect their restricted status. For the market, these are simply housekeeping matters.

But the fun is just beginning.

Fonterra leaders were last night buoyed at getting steps one and two past their prickly constituents after being shamed and sent to the naughty corner by farmers after a 2007-08 restructure attempt which proposed a partial listing of shares.

Now the real work starts.

Stage three of the proposed restructure is for share trading among farmers. It is the step that will tackle the risk to Fonterra's balance sheet of having a redeemable share structure linked to milk supply and the step that makes the market's mouth water. Will step four, five or six be a partial or even full market listing of the world's biggest dairy exporter?

According to Fonterra leaders, who tested and retested the three-step restructure plan on farmers in surveys before yesterday's voting, some shareholders wanted step three brought forward for a vote yesterday. But directors and the council held firm: there would be no discussion on this step until next year.

For directors this caution was just for show, believes one farmer seasoned in dairy industry politics. Most directors "genuinely believe" Fonterra will have to be listed to unlock its real value, he said. He expected the board to ignite the share trading discussion soon.

"They will talk about the frustrations, about the capital structure being half pregnant, they'll put it to farmers that value is being lost.

"They'll be on a roll now, they'll pick and pick at it until they get their hands smacked again."

But shareholder council chairman Blue Read told BusinessDay that shareholders – and only shareholders – would choose the company's path.

"Shareholders will choose the direction of the co-operative – by choosing the leadership of the co-operative."

Mr Read said stage three would be a "troublous discussion".

"Challenges will arise when working through stage three. Behavioural aspects will come out ... when you become investors and are able to trade out of the co-operative it is different that being a compulsory shareholder."