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Source: Reuters -
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It was over three years ago that Fonterra's management first tried to convince its 11,000 or so dairy farmer shareholder/owners that they should partially float the company on the sharemarket and allow in outside investors.
History shows that first plan went down like a cup of cold sick with conservative farmers, despite plenty of support and flag waving from the financial community.
This Wednesday in Palmerston North, Fonterra farmers will again be asked to consider voting in support of a proposal that includes provision for outside investors.
This time around though Farmers may well say yes.
So what's changed in three years?
Well for the last year or so Fonterra's management have carefully laid out a three stage plan for re-capitalising and future-proofing the company.
The first two stages - already approved - involved raising fresh capital by allowing farmers to buy extra shares in the co-operative that are not based on their milk production, so-called dry shares.
The extra money raised from this will reduce the need for Fonterra to borrow.
Farmers had little difficulty buying into this.
Stage three
However, stage three - which is what Wednesday's vote is for - is more complicated and controversial.
It allows for the establishment of a farmer only share trading platform that will see the farmer shareholders trade their shares amongst themselves as they choose.
The aim here is to prevent Fonterra from always having to buy the shares of farmers who leave the co-operative each year.
This can be a huge balance sheet or redemption risk for the company particularly if lots of farmers choose to leave at any one time.
Under the new market proposals, if a farmer chooses to leave Fonterra will then sell their shares on the market to another farmer.
There are a host of safety mechanisms attached to this market proposal to keep wary farmers on side. For example, if farmers don't want to go through the hassle of selling on the market then Fonterra will do the selling on their behalf.
And financial institutions will also be asked to become involved to help with liquidity in the market.
The market idea is a big step forward for the company and should go a long way towards helping with the redemption risk issue.
Although there are critics who claim it will reduce competition, as farmers might be less inclined than they otherwise would be to leave the cooperative for another company when the share prices is weak.
New platform
The new farmers' trading platform for shares will not however involve outsiders.
This will be provided by a new unit fund set up separately to the share trading market.
Under the proposal that will go to a vote on Wednesday, farmers will be able to sell the rights to the dividends on their shares and the capital value movement in their shares into the unit fund.
They will still own the shares and keep the voting rights that may be associated with them.
This is a crucial clause that management has kept in order to appease fears farmers have of losing control.
Now at this point, outside investors will be able to buy up a unit of the fund in the hope of benefiting from rising dividends and a rising Fonterra share price.
It's not quite a listing on the open share market, however if it is approved by farmers it will be a significant achievement for Fonterra, given just three years ago farmers didn't a bar of outsiders.
And interest in the fund could be large as access to the dairy industry for outside investors is not easy in New Zealand.
All in all this seems like a proposal that will allow farmers to have their cake and eat it too.
Three-quarters of Fonterra shareholders will need to vote in favour of the proposal. If they don't back it on Wednesday, it's hard to imagine they will ever let outside investors in.
