Capital Structure Consultation 2021

CAPITAL STRUCTURE CONSULTATION 2021

KEY THINGS TO CONSIDER

The key reasons why this is not our preferred option are: » The supply share is likely to be

Some considerations for the Dual Share option are similar to those for the Reduced Share Standard structure. » This option gives farmers the ability to choose whether or not to invest in the Co-operative beyond milk supply and the associated compulsory supply shares. » Because the supply share would carry a nominal price, this price would not fluctuate over time. This means that those farmer owners that choose to hold only supply shares would not carry any risk of movements in the Co-operative share price over time. » Farmer owners would not be required to hold any investment shares and could therefore choose to remove most of their exposure to earnings performance. » Features such as the nominal value for the supply share and the cap on investment shares could be changed over time. In addition, the dividend on supply shares, voting rights and the timeframes for sharing up and selling shares on exit could be set differently. » The impacts of a farmer-only market and the regulatory impacts outlined on page 12 under the Reduced Share Standard structure would also apply to this Dual Share option.

treated as a half debt and half equity (“hybrid”) instrument by the rating agencies that review Fonterra’s financial strength, and as debt for accounting purposes. This means that it would reduce the Co-operative’s balance sheet capacity by around $750 million (or potentially $1.5 billion if it is rated as all debt), which could limit our financial flexibility over time. » A Dual Share structure could result in less alignment among the Co-operative’s farmer owners than a Reduced Share Standard structure. Farmer owners that choose to only hold supply shares may be more interested in investment in activities that are milk price focussed with less interest in value-adding strategies and investments. On the other hand, those farmer owners with a large proportion of investment shares may be more aligned with business decisions that drive earnings. » As there would be no requirement for farmer owners to hold investment shares, there may be less liquidity in a farmer-only market than under a Reduced Share Standard. » A Dual Share structure is likely to be more complex to transition to and operate over time. We welcome your thoughts on the features of this option and the relative risks and benefits.

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