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Opinion: Fonterra makeover only a start

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Fonterra's restructuring plans may be the start of something which could get the diary giant on a solid financial footing. But not in the way that farmers may imagine.

Certainly, the New Zealand dairy co-operative would be better placed after getting the injection it wants from its 10,700 farmer shareholders.

But the real significance of its proposals may be in laying the ground work for something even more comfortable.

Not enough

Fonterra's current scheme is fine as far as it goes.

But that's not nearly far enough. Fonterra chairman Henry van der Heyden says he expects to get only about half of the NZ$900m (US$640m) that tapping shareholders could, in theory, raise.

Cash can be difficult to extract from farmers, even when they are not sapped by a collapse in milk prices.

And NZ$450m looks insufficient to fix a company of Fonterra's size, with debts of NZ$7.4bn at the last (public) count.

It is, after all, NZ$150m less than the company's outflows in the drought year of 2007-08, even after factoring in a windfall from issuing new shares for milk production.

Next step

Fonterra needs something more radical. Namely, access to funds from outside the dairy sector, which would tide it through even if the milk price stumbled, and the fortunes of Fonterra farmers with it.

Fonterra's bosses have not proposed anything so dramatic. Opposition to a stockmarket listing from farmers made sure of that.

But the plans do lay the groundwork to getting external equity investors on aboard.

Mood music

Some of the preparations are just mood music, such as talk of placing a "small minority of non-voting shares with a limited number of selected New Zealand pension funds".

But other bits are more concrete. Take the idea of adding a discount to Fonterra shares to reflect the fact that they aren't publicly traded.

That's fair play. On stock markets, illiquid shares typically trade at discounts as they do not offer investors a guaranteed exit.

And it could provide a huge incentive for Fonterra's membership to become more welcoming to outsiders. They would represent the most likely way of getting the discount back, with maybe an extra premium on top.

Tough task

Fonterra's problem is to get such a scheme in place. Persuading members to swallow a reduction on the value of their shares doesn't look easy.

Mr van der Heyden has a tough task on his hands dragging thirsty Fonterra even half-way to a bounteous capital oasis.

But at least he has taken the first steps.


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