CAPITAL STRUCTURE CONSULTATION 2021
KEY THINGS TO CONSIDER
» In a farmer-only market there may be lower levels of trading (liquidity). While we would retain a “market maker” – the registered volume provider who is active in making bids and offers on a minimum number of shares in the FSM – the share price could move more on small volumes of trading in a farmer-only market. » If we reduce the share standard and more farmers wish to reduce their shareholding than those looking to increase, there could be sell-side pressure, which could negatively impact the share price. This may be more apparent under certain circumstances. Examples include during transition to a reduced share standard (if many farmer owners choose to sell down), during a period of milk supply decline and farmers who are reducing their volumes or exiting sell their shares, or in times when all farmer owners may be negatively impacted by common events such as low milk prices or widespread droughts. » The impacts of a farmer-only market could be different to what happens during the temporary cap we have implemented in order to enable consultation. This is because all compliance obligations are on hold during the temporary cap and because we are consulting on potential changes so there is a degree of uncertainty about our future capital structure. If a Reduced Share Standard structure is implemented, then that uncertainty would no longer exist – some farmer
owners would be required to trade shares to at least comply with the Reduced Share Standard and some farmer owners may choose to buy shares over and above their individual minimum requirements. » The Fund also provides a mechanism for those with connections to the Co-op such as sharemilkers, contract milkers, employees and retiring farmer owners to invest in the Co-op. With the No Fund option, this would no longer be available. Flexibility in how this structure could work We have put forward some of the mechanics for how a Reduced Share Standard structure could work and we hope that these will help guide our discussions during consultation. However, many variables are flexible, and we welcome your feedback.
Impacts of a farmer-only market » If we moved to this structure, shares would be traded within a farmer-only market, either with the No Fund option or Capped Fund option. » The biggest implication of trading in a farmer-only market is that farmers will set the price for shares through trading amongst themselves. This is likely to be different to how outside investors value units in the Fund today. » You may hear the potential price difference in a farmer-only market referred to as a “restricted market discount”. Restricted market discounts are commonly observed in any market where participation is restricted (in this case, to farmer owners). A restricted market already exists in other New Zealand agricultural companies you may be invested in. » We can’t be certain what the price difference might be, but the advice that we have received is that in normal trading the share price is likely to be in the range of 20-25% lower than if the current structure was retained. If there are times when there is stronger sell-side pressure – for example if farmers are experiencing financial pressure
» The Reduced Share Standard is intended to provide meaningful
flexibility for farmers to reduce their shareholding while ensuring there is sufficient ability for other farmers to hold a greater number of shares without giving rise to a significant concentration of ownership. We propose that a share standard ratio of 1:4 with a 4x maximum shareholding cap (or for shares held in excess of supply, 5% on a look-through basis) strikes a good balance. A higher share standard ratio of say 1:2 might not provide enough flexibility for new and young farmers. A ratio of say 1:10 that
or otherwise need to sell shares (for example if milk supply falls) – then the discount is likely to be greater.
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