Fonterra’s Capital Restructuring
When Fonterra was formed under its own special legislation, the government sought to level the playing field for competitors and expose Fonterra to pressures to perform. Constraints were placed on the mega co-op, many of which have since been removed or relaxed. Fonterra is now proposing a capital restructure which would see one of the last legislative restraints on Fonterra – the fair-value entry and exit requirements – removed.
In December last year TDB was commissioned by MPI to assess the likely financial and economic implications of the restructure. In our assessment, removal of the fair-value entry and exit requirements would:
- discount Fonterra’s share price by 35 to 50% relative to the fair-value price at which Fonterra’s shares would trade in an unrestricted market;
- reduce the pressure on Fonterra’s management to perform as farmers would be incentivised to supply Fonterra even if it is not performing well;
- reduce the incentives on Fonterra to innovate and add value for its farmer shareholders; and
- result in a misallocation of resources and tilted playing field as farmers are incentivised to provide their milk to Fonterra rather than competing processors.
Though there may be good commercial reasons for Fonterra seeking to attract additional supply when there is excess capacity in the dairy-processing sector, Fonterra’s commercial interests are not necessarily the same as the national interest. While Fonterra enjoys a 79% market share and operates under its own special legislation, it is important that constraints remain on Fonterra that counterbalance its privileged position in the dairy sector and the national economy.
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