Alongside its annual financial results, Fonterra Co-operative Group Limited has today announced that it will proceed with an ownership review of Fonterra Australia.
One option includes an initial public offering (IPO), with the intention that the co-op retains a significant stake.
When Fonterra's capital structure review consultation process commenced in May, FSF Management Company Limited, manager of the Fonterra Shareholders' Fund, formed a subcommittee comprising its three independent directors, to consider the implications of the review for the fund and unit holders.
The Fonterra Shareholders' Fund, of which an estimated 56 per cent of units held by farmers and former farmers, was issued with a statement from the subcommittee chairman John Shewan on September 23.
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The statement revealed the subcommittee was "disappointed by the revised proposals", which Fonterra calls "flexible shareholding", saying they were at odds with those put forward in May.
In an online survey, Fonterra asked farmers to list their top three priorities when it comes to Fonterra's capital structure.
Some 82pc of respondents ranked ownership and control as their top priority.
"This reflects farmer discomfort with external investment," the statement read.
According to the subcommittee, fund investment returns have failed to meet expectations and the capital structure review has caused further value loss to unit holders.
Based on recent trading on the NZX, the fund's unit price has dropped by around 20pc since details of the review were announced in May, while the Fonterra share price has fallen by about 32pc.
However, Fonterra's chief executive officer Miles Hurrell said the Australian business was on strategy and remains important to the co-op.
"By having access to ongoing external capital, we believe the Australian business will be best placed to deliver on its strategy and capture its full potential, at the same time as unlocking capital for the co-op," he said.
"The strength of the Australian business has been demonstrated through recent results and execution of its strategic plan.
"Under the leadership of René Dedoncker, the Fonterra Australia management team has a clear strategy to maintain the business's current momentum, supported by continued investment in product mix and growth."
Fonterra Australia managing director René Dedoncker has welcomed the ownership review.
"Today's announcement is an important milestone for our business which plays a significant role in the Australian dairy industry," he said.
"It would be a great outcome if Australian investors, including our staff and the farmers who supply us with their milk, could have the opportunity to participate in the ownership of our business with its iconic Australian brands such as Western Star, Perfect Italiano and Bega.
"As we explore our options we will be mindful that our customer and farmer relationships are core to our business.
"These key stakeholders can be confident there will be no change in how we engage with them through this period, while an outcome that results in improved access to external capital will enable Fonterra Australia to continue advancing the Australian dairy industry."
The co-op is aiming for a farmer vote at its annual meeting in December.
Before a vote could take place, at least 50pc of Fonterra Co-operative Council members would need to support the final proposed changes.
The approval of 75pc of votes from voting farmers would then be required.
Fonterra annual results
Fonterra has announced a strong set of results for the 2021 financial year, reflected in a final farmgate milk price of $7.54, normalised earnings per share of 34 cents and a final dividend of 15 cents, taking the total dividend for the year to 20 cents per share.
CEO Miles Hurrell says the last three years have been about resetting the business.
"We've stuck to our strategy of maximising the value of our New Zealand milk, moved to a customer-led operating model and strengthened our balance sheet," he said.
"The results and total pay-out we've announced today show what we can achieve when we focus on quality execution and an aligned co-op.
"I want to thank our farmer owners and employees for their hard work and commitment over the last few years that has got us to this position."
Looking to the current season, Fonterra has announced a 2021/22 earnings guidance range of 25-40 cents per share and has also reaffirmed its 2021/22 forecast farmgate milk price range of $7.25-$8.75 per kg MS, with a midpoint of $8/kg MS.
Mr Hurrell said the strong milk price was likely to continue.
"A high milk price is good for farmers and good for the New Zealand economy," he said.
"However, this does have the potential to squeeze our sales margins and impact earnings."
Mr Hurrell said the impact of COVID-19 continued to be felt, particularly across the supply chain.
"We expect competitive tension in the global shipping market to continue this financial year," he said.
"We have largely been able Fonterra Co-operative Group to mitigate this thanks to the strength of our Kotahi partnership which has allowed us to keep our product moving through the supply chain."
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