Fonterra has dampened down speculation it is in crisis and under threat of sale to foreign bidders.
Chief financial officer Marc Rivers rejected any notion of a fire sale of assets, saying New Zealand’s largest company was taking a disciplined review of its portfolio.
He acknowledged the co-op’s share price had tumbled to $3.50 on Thursday, down from $4.25 at the start of May, and that had led people to question what was happening.
But by Monday it had bounced back to $3.72.
Fonterra CFO Marc Rivers says he’s up to the challenge of helping turn Fonterra around.
«It’s hard to know, there’s no change in the underlying business operations that would have driven a change in the share price down and then back up again. But I guess the market recognised that.
«Over the last 12-18 months some institutional holders have been selling down and some retail investors buying in. No doubt a portion of those would be farmers as well, but we don’t know with extreme precision. No doubt a lot of people are taking a wait and see approach with the strategy coming out in September, along with annual results,» River said.
There was a combination of factors which may have caused jitters in the market. He singled out the sale of Westland Milk Products last week to Chinese bidder Yili, and negative commentary from «various experts».
One of those was economist Peter Fraser who charged Fonterra had created little economic value over its 18-year life, that farmers were paid too much for their milk, and the value-add strategy had been a failure.
He raised the prospect Fonterra might end up in foreign ownership, like Westland.
Rivers defended the price farmers were paid, saying the milk price mechanism was transparent, overseen by the Commerce Commission and auditors.
He has been supported in a note penned on Friday by Jarden analyst Arie Dekker, himself a frequent critic of Fonterra performance.
Dekker said it was not «credible» to sheet home the share price fall to an overpaying of the milk price, but that other factors such as capital expenditure had seen value destroyed.
«If the milk price was being overpaid to the extent some commentators suggest then investment by independent processors in the sector would not be ongoing as it has been in the last ten years – certainly a lower milk price would make those independents more profitable.»
Dekker said some farmers exiting or reducing supply to Fonterra at the end of the current season may have generated some share selling, although they had until April next year to complete their exit.
On the other hand, because of the low price, some might be delaying selling, while farmers who were buying in might see the timing as right.
«Even in the context of the Fonterra Shareholders Fund we have known over the last five or six years, current levels might provide a basis for dipping a toe cautiously in the water,» Dekker wrote.
Not only was a fire sale of assets unlikely, but the claim Fonterra’s wellbeing was at the mercy of banks was undermined by its strong credit rating. However Dekker warned a downgrade would come if it did not divest assets.
Rivers said Fonterra and Westland were totally in different circumstances.
«Re assets, the approach is to ask if it is core to our strategy. If the answer is no, then why do we have capital tied up in that. It’s not something you do just when you get in trouble, we should be doing that all the time.
«One you decided you don’t need to own it, you go through a proper process to ensure you determine the market value. Tip Top was a good example, we ran a thorough process, got a good value and found a responsible owner.»
He said Fonterra was sensitive to the value of the shares being higher or lower, because while it did not affect the co-op, it lowered farmers’ equity, which put pressure on them from bankers.
A farmer with the average herd size of 431 cows, producing 158,000 kilograms of milksolids a year, would pay $587,760 for Fonterra shares today, whereas at the beginning of last year the price would have been over $1m.
In order to have their milk collected by the dairy giant, farmers have to buy the shares, although there are options to allow a new supplier to meet the requirement over a period of time.