Editorial - Fonterra's big dilemma
In Fonterra's 2006-07 annual report, chairman Sir Henry van der Heyden said capital for growth was among the big issues facing the co-operative. Capital was needed to exploit the many international opportunities that would generate its earnings and its growth.
Later in 2007, company chiefs unveiled a capital structure to meet three over-riding needs: to better manage farmers' redemption risk (Fonterra proposed to do this by making its shares tradeable rather than redeemable); to give farmers investment choices; and to raise new capital from external investors to pursue growth opportunities. The co-operative feared farmers could not raise enough money for growth projects. If it didn't come from external investors, Fonterra risked becoming a regional player. But external investment is a sensitive issue among farmer-shareholders, who jealously guard their ownership. This anxiety ensured Fonterra's favoured option for a capital restructuring was scuttled. Even now, while enabling legislation is being examined by a select committee, farmers are having second thoughts about a revised scheme (Trading Among Farmers) that was endorsed by a majority of shareholders. Since the capital restructuring was first mooted, Fonterra chief executive Andrew Ferrier has been succeeded by Theo Spierings and the purpose of the project modified. As Mr Spierings reminded farmers this week, TAF is no longer about raising capital – it's about protecting the co-operative and preserving 100 per cent farmer control.
Maybe so. But Fonterra will need more capital and Federated Farmers dairy chairman Willy Leferink is mooting the spinning off of Fonterra's overseas interests into a listed company to raise cash. Actually, they could be spun off into more than one listed company. Farmers would remain secure in their control of the main company and outside investors could judge the specific prospects of the spinoff enterprises before taking a stake. Mr Spierings has rebuked Mr Leferink for making "ill-informed" comments ahead of Fonterra shareholders voting (again) on TAF next month, but he did not rule out Fonterra seeking partners for its overseas farming or processing ventures, and he can't rule out the reality that, whatever TAF is intended to do, Fonterra can't make the most of its opportunities without capital from investors other than its farmers.