Fonterra's shares, under new valuation, have to climb 18% to reach 'base price'

Thursday 3rd December 2009

Fonterra Cooperative Group, the world’s largest exporter of dairy products, is worth $3.83 a share, based on its new restricted market valuation, meaning the securities have to climb 18% to reach the so-called ‘base price.’

The cooperative today released the valuations from Grant Samuel that recognize share of Fonterra are not freely traded. The farmer-shareholders approved the change last month while voting to allow themselves to hold shares amounting to 120% of their production in the first step of a strategy to restructure the company. Farmers will be able to buy so-called ‘dry’ shares over the next few weeks.

Fonterra has agreed to hold its shares at a base price of $4.52, the prevailing level for the current season until the ‘restricted’ price catches up, to ensure shareholders aren’t disadvantaged. Under the old valuation methodology, Grant Samuel assessed the 2010/2011 Fair Value mid-point at $5.10, a 13% increase from the current season.

Chairman Henry van der Heyden said the Fair Value increase reflected a rise in the value of Fonterra’s consumer brands and international ingredients businesses, partly offset by a lower valuation for its commodities business.

Holders of 89.6% of Fonterra’s stock voted last month in favour of strengthening the company’s share structure while agreeing to an effective freeze on the so-called Fair Value price. The changes are a precursor to a more radical shake up, requiring a separate vote, where the shares would become tradable among shareholders.

The company would also cease redemptions of the shares, which it does now, to ensure farmers’ holdings match up with their production each year – a process that causes huge fluctuations in Fonterra’s equity capital. Current arrangements forced it to pay out $742 million in redemptions after the 2007/2008 drought.

Allowing farmers to add try shares to their holding may allow Fonterra to raise as much as $900 million. Grant Samuel said it was difficult to estimate an appropriate discount, or restricted value for the shares ‘with any meaningful degree of precision” until the restructuring moves to its next phase and farmers can trade the shares.

Fonterra also announced its board has approved a policy of targeting a dividend payment ratio of 65%-75% of distributable profit, meaning it will retain 25-35%.

For the current year, distributable profit will be between 35 cents and 45 cents a share, with a dividend payable of 20 cents to 30 cents, it said.

Businesswire.co.nz

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