Fonterra Listing will erode NZ ownership.

by James Ritchie National Secretary

Fonterra have announced their preference for restructuring the capital base of the cooperative.
It involves turning the Coop into two companies - one owned solely by farmer shareholders (Fonterra Farmer Cooperative) which is about buying the milk from farmers and determining the payout.
The second company - Fonterra - will do everything else including owning all the assets and liabilities, the manufacturing, marketing and brands.
This second company will be listed on the sharemarket. When this second company is floated, the Fonterra farmer cooperative will own 65% of the shares, individual farmers 15% of the shares and the public 20% of the shares.
Fonterra have built into the proposal a number of special protections.
1. The Fonterra Farmer Cooperative could not own less than 50.1% of Fonterra unless Fonterra Farmer Cooperative's shareholders agree with at least a 75% vote.
2. No shareholder could hold more than 10% of Fonterra's shares other than the Fonterra farmer Cooperative.
3. Milk pricing arrangements will be laid out clearly.
4. Fonterra's headquarters must remain in NZ
5. A cornerstone cooperative share will ensure shareholders will always have the right to have all of their milk collected by Fonterra and adequate capacity will have to be maintained in NZ to process all of the farmers' milk.

These special protections could be changed by 75% farmer shareholder vote.

Fonterra have agreed with the Government to enshrine some of these protections in legislation. For example if 75% of farmers voted to reduce the 50% plus 1 shareholding in Fonterra, the Coop's shareholding could not go below 35%. Fonterra will be required to have its primary listing in NZ although will also list in other countries such as Australia.

While these protections are welcome, the Dairy Worker does not believe they will prevent the erosion of NZ ownership in the company nor protect the company from investors which can destroy value within the dairy industry.

This is NZ's most lucrative industry and we want the profits of this industry coming back to NZ and being distributed throughout our communities and creating permanent well paid and secure jobs.
These protections and all the public relations blah blah about allowing other NZers to take up shares will not prevent the publicly listed shares ending up in the hands of institutional investors. Institutional investors do not always generate wealth. Through the proposed new structure, an institutional investor would not be able to takeover all of Fonterra. It remains to be seen whether or not investors will target Fonterra to buy shares and exert pressure to break off parts of the company for a full listing. Once this happens a fully listed company is open to a private equity buyout. Private institutional funds buy a listed company and turn it private. In a private equity buyout the target company pays the costs of its own acquisition through debt and fees and in the process often destroys the value of the company.

Other multi national food companies may target Fonterra shares to shore up their own market dominance by integrating their global strategies and lessening the likelihood of Fonterra being a direct competitor.

Finally as NZ ownership lessens, so does the likelihood that Fonterra will continue to invest in secondary processing in NZ creating further jobs and wealth for the country.

There is little doubt that this generation of farmers will do very well out of the proposed capital restructuring. Whether or not the nation benefits, and how future generations fare, and what are the implications for future working conditions and job opportunities,are the questions which need to be put up and debated.

The NZDWU will be seeking more information about the capital restructuring proposal and will discuss the issue with members at meetings next year.