Third-stage approval one of next year's hurdles: Fonterra

New Zealand's biggest company needs to get capital structure off its agenda and focus on running the business, Fonterra chairman Sir Henry van der Heyden says.

Getting shareholder approval for the proposed third stage of the dairy giant's capital restructure, share trading between its farmer-owners, is one of two big challenges his board will face next year, he said.

The other challenge would be the international market.

"I'll be really interested to see where demand and supply of milk ends up. It's all playing out now. The price rise (in commodity products) is based on supply being tight, not on demand improving. It's still very fragile."

Fonterra's payout to its 12,000-odd farmer suppliers is an economic cornerstone and its level depends on the prices the world's biggest dairy exporter gets for their milk products.

Van der Heyden, who plans to seek re-election as a director next year, said it was time to put capital structure to bed.

"We've been talking about it for two or three years, we need to get on and focus on running the business."

Fonterra, which had revenues last year of $16 billion, is a private company 100 per cent owned and controlled by its 10,500 farmer-shareholders through a co-operative.

In November, they approved the first and second stages of a three-step capital restructure aimed at raising equity to pursue growth ambitions and rid the company of what it calls "share redemption risk".

Fonterra farmers must buy a share for every kilogram of milksolids they supply. If their anticipated milk production falls short, Fonterra must pay out for unused shares. The co-operative bled $2b equity from its balance sheet in the past two years because of share redemptions, largely provoked by drought.

Stage one of the long-debated capital restructure is a new share issue not linked to milk production, which has the potential to raise up to $1b extra capital from farmers. Stage two is the revaluation of Fonterra's shares to reflect their restricted trading status. Up until now they have been market valued, even though they have not been tradeable.

Stage three is share trading between farmers, likely to be up for debate from February.

Fonterra directors have ruled out any sort of market listing of shares in the foreseeable future, after being forced by farmer-shareholders to back down on a November 2007 capital restructure proposal involving a partial listing.

Van der Heyden rated shareholders' vote of support last month for steps one and two as a highlight of the year.

"To get 90 per cent in a co-operative with so many stakeholders and so many people who want different things is a big ask.

"We learned a lot from November 2007. One, you take small steps, two you need alignment between the board and the (Fonterra) shareholder council, three, farmers put less emphasis on (share) value than we thought, and fourth, you put all the information out there at once, you don't put it out there piecemeal like we did in 2007.

"What drove the 2007 (proposal) for the board was value, making sure the capital structure delivered value. What farmers said this year was that (share) value was not that important. That is why they supported step two which valued Fonterra on a restricted value (basis)."

Van der Heyden said a big surprise in 2009 had been the volatility of the world dairy market.

"It can turn around so quickly ... and it makes it very uncertain and difficult to forecast (returns)."

It was a topsy turvey 2009 for Fonterra farmers. They started the 2008-09 dairy season with a payout forecast of $7 but finished it at $5.20 after recession-driven price plunges.

- © Fairfax NZ News