What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
That’s the big question as Fonterra’s share price continues its painful march southwards.
The co-op was in trouble even before its shock announcement on August 12 that it expected to incur a reported loss of $590-675 million this year -- a 37-42 cent loss/share from writedowns of up to $860m.
On Friday, August 9, Fonterra’s shares were trading at $3.76/share, still far from their heyday of $6.60/share.
Last week, the share price had dipped to $3.17/share, wiping millions of dollars off farmer shareholders’ balance sheets.
Banks are already putting pressure on farmers. Whether Fonterra is facing similar pressure from its lenders is hard to tell. But it’s not hard to tell that Fonterra is nearly at the edge of the cliff. Despite writing down bad and poor investments it needs to do more.
Expect bad news for Fonterra staff when chairman John Monaghan and chief executive Miles Hurrell front up with the co-op’s annual results on September 12. The co-op is set to trim its workforce and drastically cut costs. But whether these are enough to arrest the slide in the share price remains to be seen.
What else can Fonterra do?
This brings us to the capital structure. In 2012 Fonterra introduced Trading Among Farmers -- an attempt to keep 100% ownership and control with farmer shareholders and at the same time enable access to outside capital.
Back then Fonterra farmers were in no mood to put any part of their business with outside investors. But now the co-op’s financial predicament could force farmers to think differently.
The co-op has already started capital restructuring talks on a board sub-committee and with management. It’s crucial for Fonterra to get this right. Some directors are eager to float part of the co-op while others remain adamant about 100% ownership and control.
The final decision remains with farmers.
These are worrying times for Fonterra. Perhaps this is the time to consider a cornerstone investor to bring capital to restore credibility to the balance sheet and confidence among investors.
Now is the time for Fonterra shareholders to act. Leaving it too late could take the co-op down the path taken by Westland Milk. That would be disastrous for all.
