Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
Outgoing chair of FSF management company John Shewan told the meeting that unit price decreased 8.4%, from $3.71 in August last year to $3.40 on September 22 when Fonterra released its annual results. Since then, the price has dropped a further 10.9% to $3.03.
"How the implementation of Fonterra's new capital structure might impact the unit price has played its part in subduing the price," Shewan says.
There was a sudden drop in the unit price towards the end of April and into May 2022.
This coincided with the release of the report by the financial and economic consulting firm Castalia.
Shewan says the report contained a number of assertions that Fonterra did not agree with.
"The Castalia report asserted that protections for a fair milk price will be eroded and that Fonterra's capital restructure will cause Fonterra's Milk Price to increase," he says.
"Castalia also estimated Fonterra's future share price on the basis of possible dividends up to 2030 but appeared to assume that Fonterra has zero value at the end of 2030.
"Fonterra, as does the board of the manger, considers this to be a misleading approach to valuing Fonterra shares and FSF units."
Shewan says Fonterra also strongly disagrees with the contention that the capital structure changes will increase its milk price paid to farmer suppliers.
Other factos also impacted the unit price.
Shewan says the unit price performance was also impacted by heightened volatility in equity markets and the lower valuation of equity markets both in New Zealand and overseas.
"This reflects uncertainty driven by inflationary pressure, higher interest rates, geo-political events and recessionary concerns," he says.
He pointed out that the relative NZX50 Index has declined 12.7% over the same period.
The independent directors of FSF still believe that the co-operative should have bought the Fund back, as part of its capital restructure process.
"I believe that the sequence of events and adverse impact on unit price since the May 2021 announcements shows very clearly why our concerns were entirely justified."
Instead of spending about $500m to buy the Fund, the co-op instead decided retaining the fund and capping its size.
But the implementation of Fonterra's new flexible shareholding capital structure has created uncertainty for unit holders and potential investors over what the impact might be on the unit price.
Shewan says this uncertainty may reduce as implementation of the new capital structure proceeds through 2023.
The Fund is currently capped at 107.4 million units and valued at $325m last week.
The drop in unit prices shaved off $93m from the fund's market capitalisation, from this time last year.
Shewan has been replaced as chair by Mary-Jane Daly.
