Dairy giant Fonterra hopes its plans for a share sale will give the company the cash it needs to fund overseas expansion. Chairman Henry van der Heyden has called on the co-operative’s 11,000 members to be “bold and brave” and back the plans. And with dairy consumption booming in markets like China, Dean Best believes this is a too good an opportunity for Fonterra’s farmers to ignore.
November 15th 2007 will go down as a watershed day in the history of Fonterra, New Zealand’s largest company and the world’s largest dairy exporter.
It was a day in which Fonterra’s management signalled that it wanted to shake off the shackles of its co-operative structure and laid down a blueprint for the company’s future growth.
Fonterra chairman Henry van der Heyden set out plans to divide the co-operative in two and float its business operations as a separate company.
The Fonterra executive team wants to list the company’s business operations, with a 20% stake being made available to the public. A share sale, the management hopes, will give Fonterra the cash it needs to fund overseas expansion.
Industry watchers believe this move is vital to Fonterra’s future. Dairy consumption is booming in many of the world’s developing markets, particularly in Asia, where protein is featuring more in people’s diets. China is seen as the market offering the brightest prospects for growth. Since 1999, the Chinese government has decided to vigorously promote milk consumption, particularly among schoolchildren. As a consequence, China has become home to a very buoyant dairy sector.
Fonterra has already made moves into China, including the acquisition of a stake in Shijiazhuang SanLu, one of the country’s leading dairies. However, Fonterra needs to step up its investment in China to ensure it keeps pace with the rapid growth of the country’s dairy sector.
Demand for dairy is also rising in Latin America. This week, New Zealand Prime Minister Helen Clark signed a deal with her Uruguayan counterpart to boost bilateral investment in both countries. Clark highlighted the role investment from New Zealand could have in the growth of Uruguay’s burgeoning dairy industry. And Fonterra, as the flag-bearer of New Zealand’s dairy industry, will aim to be at the forefront of that venture.
“To expand into off-shore markets, Fonterra needs access to capital,” Mark Lister, a New Zealand investment analyst at ABN Amro Craigs tells just-food. “With the way dairy prices are going, and the way demand is for protein coming out of Asia and China, it represents a one-off opportunity. Fonterra needs to grab the ball and run with it.”
Fonterra’s flotation plans also represent a welcome opportunity for New Zealand’s investment community, says Lister. “Fonterra is our biggest company by a long way,” Lister says. “We’re basically just a small farm! The whole backbone of the country’s economy is agriculture but, at the moment, you can’t invest in the sector unless you’re a farmer yourself.”
Naturally, Fonterra’s farmer shareholders – which number some 11,000 – would want to protect their investment in the co-operative. Under the company’s plans, the farmers will maintain full control of the company’s milk supply business and, crucially, own about 80% of the listed business. For at least two years, farmers will retain full control of both businesses before a listing of the operations unit.
Van der Heyden and his colleagues have structured their proposals this way to alleviate concerns among Fonterra’s farmer members that a float would lead to them losing control of the company.
But van der Heyden insists that the co-operative needs to be “bold and brave” amid fierce competition in the global dairy market. “Bold in that this is another transition for our co-operative; brave in that it is a big step, even bigger than the three-way merger that formed Fonterra six years ago.”
Lister believes Fonterra’s farmer shareholders should embrace the company’s strategy. “There is a bit of conservatism [among the farmers],” he says. “Some of them are very parochial. They won’t want to lose control and see corporates in new suits take control of the company.
“But, they just need to get their heads around what this means to them. They need to take a long-term view and see the opportunities this gives them to do better.”
Three-quarters of the farmers would need to approve the restructuring plans for them to go ahead. However, Fonterra’s plans seem an opportunity that is too good for its farming community to ignore. The global dairy industry is in a state of flux right now. Prices are booming. What were once lucrative traditional markets are stagnating, while consumers from markets to China and Uruguay are turning to dairy products in their droves. Fonterra’s float will give the company the best chance to tap into that growth. Its farmers should favour that.