TAF set to pass, but not convincingly
If the largesse of Fonterra chairman Sir Henry van der Heyden’s farewell party later this year depends on the strength of farmers’ voting for the vexed share trading among farmers (TAF) plan, maybe he shouldn’t count on more than a few beers and a barbie.
A tortuous two-year push for a capital restructure which introduces share trading to New Zealand’s biggest company grinds to a merciful halt on Monday at a special shareholders’ meeting in Hamilton.
Typically of TAF, things are still untidy.
Industry legislation, which also enables TAF and is a precondition of Fonterra Shareholder Council support for share trading, has not come through in time for the vote, and may be aweek or so away.
But it will be passed Beehive insiders say, because the Government wants it.
Even so, van der Heyden and his board face an uneasy wait until Monday.
Yes, TAF will probably get over the line. It’s rare that farmers vote against their cooperative. But industry money yesterday was on TAF getting a measly 60 per cent support or less.
This will be a body blow for van der Heyden, who dismissed a farmer campaign against TAF as the work of a rowdy minority, but was nevertheless eventually forced to allow this second vote.
Van der Heyden now says he wants a clear mandate for TAF. Observers say anything less than a 65 per cent vote will leave the board open to legal challenges and shareholder calls for more special meetings.
This is the second – some say third – capital restructure attempt van der Heyden has led. It’s been suggested he has spent half his 11 years of chairmanship of New Zealand’s biggest company trying to demutualise it.
So Monday holds the risk of much loss of face. While the chairman might claim 60 per cent as a ‘‘clear mandate’’, his fellow directors are unlikely to do the same.
Van der Heyden goes in November, but they’ll be left with the bruises.
Dynamic new chief executive Theo Spierings will also be sour if he is handed a poorly supported TAF regime. Imported from Europe to drive the company hard into its second decade, he must know Fonterra’s much smaller but nimble competitors are all for TAF.
The scheme’s invitation to sharemarket investors to buy units in Fonterra shares will create tension between what Fonterra makes available for dividend and what is left for milk price, the lifeblood of farmers. But a prospect that has spooked farmers can only be good for the independent companies. The less they have to pay for raw milk the longer they will stay in business against a juggernaut that still controls 90 per cent of the country’s raw milk supply.
And if TAF doesn’t get over the line Spierings won’t thank the board for what could happen to Fonterra’s share price. If TAF is torpedoed, the pending industry legislation will see Fonterra share pricing returning to the pre- TAF ‘‘fair value’’ methodology. This means the share price will balloon from the current ‘‘open market valued’’ $4.52 at which the board has held it in preparation for a TAF market, to a ‘‘fair value’’ of more than $5.50, which will reflect the shares’ restricted market.
While farmers who had $2 billion wiped off their share values by the board’s shift to $4.52 may cheer, Spierings could see his farmers selling shares for the higher price and defecting to independents who don’t make them buy shares to supply milk. Which would take the whole circus back to square one.
Fonterra’s leaders dreamed up TAF to remove ‘‘redemption risk’’ – the obligation for Fonterra to cash up the shares of farmers who want to exit or reduce milk supply, thus making its balance sheet vulnerable.
The increasingly shrill tone of a Fonterra email and statement blizzard in recent days urging support for TAF or dire consequences suggests Fonterra’s own polling among its 10,500-odd shareholders is not comforting.
An influential industry watcher says the problem is a legacy ‘‘trust’’ issue with van der Heyden and his board from 2007 when they committed the heresy of proposing a partial sharemarket listing.
It never got to a vote and the backlash from farmers was ‘‘vicious’’.
(Van der Heyden took until mid-2009 to resign as a director of the New Zealand stock exchange – an odd appointment for a cooperative chairman to accept in the first place.)
But TAF has deeper problems. Many farmers have forgotten why Fonterra needs it. Hardly surprising given it’s been two years since they first voted for it.
The delay has proved problematic because the world is an even more uncertain place than in 2010 and it could be argued that Fonterra has not stayed on TAF message.
While effective governance can’t be easy when dealing with a co-operative ‘‘committee’’ of 10,000-plus people, information voids and inconsistent messages from the top have haunted the TAF process. When detail started emerging last year, farmers say directors sprang nasty surprises in the small print.
The plan to allow outsiders to buy units in up to 20 per cent of shares farmers might sell to the TAF market was seen by many farmers as partial privatisation of Fonterra by stealth, the first step down a ‘‘slippery slope’’ to loss of their co-operative control in the name of securing permanent capital.
Complicating everything has been the snail’s pace of enabling legislation, a public furore over high Fonterradriven milk prices, and the impression directors were railroading TAF through to meet some notional November deadline.
TAF is a victim of its own clunky structure. A hybrid of co-operative and sharemarket aspirations, it is at best a poorly understood stopgap measure which has cost farmers millions of dollars in developing and taken Fonterra leaders’ eyes off the ball for too long.