Fonterra shares may fall if plan goes ahead

Fonterra units slipped more than 12 per cent yesterday morning after the dairy co-operative announced a rethink of its capital structure.

Units in the listed Fonterra Shareholder Fund dived 59c to $4.01, before rebounding to $4.27, after a two-day trading halt.

However, analysts say it could be several months before farmers come to any decision on what they should do about the fund.

‘‘I think we are a long way away to having resolution on where this goes. Previous changes to the capital structure have taken a lot of time to get through,’’ Jarden analyst Arie Dekker said.

The fund is Fonterra’s way of allowing non-farmers to invest in the industry but in Thursday’s announcement, the company said its preference was now to buy back or cap the fund.

It says removing outside investment and placing trading back entirely in farmers’ hands could lower the cost for new farmers getting into the industry.

At the same time, its farmers have temporarily been prevented from exchanging their non-production linked, ‘‘dry’’ shares for units during the consultation phase, in case the listed fund gets too big for farmers to buy back.

Unit holders have no voting or ownership rights but Fonterra argues farmers could still lose their power base if too many dry shares get converted to units.

In its consultation document, Fonterra said bringing the shares back in-house would mean farmer dynamics would set the share price rather than the fund.

‘‘We can’t be certain what the price difference might be but the advice we have received is that in normal trading the share price is likely to be in the range of 20-25 per cent lower than if the current structure was retained,’’ the document said.

‘‘If there are times when there is stronger sell-side pressure – for example if farmers are experiencing financial pressure or otherwise need to sell shares (for example if milk supply falls) – then the discount is likely to be greater.’’

However, Dekker said there was a ‘‘lot of water to flow under the bridge’’ before it was clear what effect this would have the price of units.

‘‘As far as a winding up of the unit fund is concerned, I think there will be a number of farmers ... who will be concerned about the impact of reducing that demand pool.’’

Fonterra needs 75 per cent of unit holders to approve of changes to the fund, as well as 75 per cent of its farmer owners.

However, the dairy co-op maintains that doing nothing is not an option if it is to ward off a potential decline in the milk supply.

Fonterra’s figures on Thursday showed its supply could drop from 1517 million kilograms of milk solids in the 2019/2020 season, to 1200-1300 million kgMS in the next decade.

Part of the decline is due to environmental restrictions and a trend towards other land uses.

Fonterra chairman Peter McBride said changing land use was in many ways its biggest competitor.

Dekker said Fonterra was ‘‘right to focus’’ on retaining its critical mass and the reasons for canning the fund were obvious.

However, removing or capping outside investors should be considered carefully. If Fonterra was to continue paying off debt and improving its balance sheet, the numbers might be different.

And an improved performance might also keep farmers from exiting or defecting to other companies.

But without outside investors, if the milk supply continued to drift down, ‘‘then the burden of funding the co-op will fall on a decreasing number of farmer shareholders’’.

‘‘We are a long way away to having resolution on where this goes.’’

Arie Dekker Analyst