A FEW weeks out from the vote on Murray Goulburn's (MG) new capital structure, shareholder scrutiny is increasing.
Last week Australia's largest dairy foods company announced it would hold an extraordinary general meeting on May 8 to vote on a plan to raise $500 million in capital, mostly by conducting an initial public offering of a unit trust which will be listed on the Australian Stock Exchange.
Dairy farmers who are the co-operative's existing shareholders have raised doubts the proposed structure will ensure they retain 100 per cent control.
Ian MacAulay, who supplies milk from his farms near Yarram to MGG and is a former chairman, said there were inherent risks in moving away from a farmer-controlled co-operative structure to one with outside investors driven by share prices.
"No man can serve two masters," Mr MacAulay said.
"That external shareholders will have no impact is a Furphy."
He said New Zealand's Fonterra had moved to have non-voting shareholders in 2012 and only a few years on it was struggling to best navigate suppliers' and other shareholders' interests.
The Fonterra Shareholders' Council in recent weeks expressed disappointment that the current low farmgate milk price (FMP) of $4.70 per kilogram of milk solids did not reduce production costs and boost dividends as expected - in fact, the interim dividend of 10 cents a share and forecast range for the 2014-15 season were lower than expected.
An MG spokesperson highlighted a significant difference in its proposed restructure compared to Fonterra's: MG is proposing a "farmgate milk price and profit-sharing mechanism" that creates clear alignment between MG suppliers and external investors.
Under this mechanism, suppliers and external investors will receive the same dividend so that when the FMP is lower, available dividends will also be lower, and when the FMP is higher, the reverse will be true.
"The purpose of the proposed capital structure is to support a sustainable increase in the FMP - we wouldn't be proposing it otherwise," the spokesperson said.
Mr MacAulay said MG had created a "complicated matrix" of ownership and influence, including on FMP, and the company's constitution gave some protection to farmers' interest.
However, the move to include external investors who were driven by share prices could set MG on a path that could, over the years, irreversibly weaken the benefits of a co-operative structure, including putting farmers' and local communities' interests at the fore.
Mr MacAulay said he did not want to see MG added to the long list of failed Australian agricultural co-operatives, saying: "MG is too valuable to lose."
"People tend to forgot that a co-operative always takes the amount of milk people supply whereas it's not always the case in propriety businesses, and that's been fundamental to the growth of the dairy industry," Mr MacAuley said.
He said he was also concerned that MG had taken on too much debt.
According to MG's interim financial report for the half year ending December 31 2014, borrowings (including current and non-current liabilities) had increased by $169,590,000 (or 28.2pc) to $770,754,000.
The MG spokesperson said MG was comfortable with its debt level, which they said was appropriate, taking into account the investment cycle, business size, increasing milk supply, cashflow profile and the fact the company was investing in improved manufacturing capabilities and infrastructure upgrades.
The spokesperson added MG would deliver the promised $100 million in savings during the 2015 financial year.
Mr MacAuley acknowledged MG's need to invest in its operations to remain competitive but said the proposed restructure was "a really expensive way of doing it" and would permanently change the company.
"I believe we've had good financing structures in the past and if no-one will finance what you want to do, then chances are what you're proposing isn't good."
Nonetheless, he said he expected there would be support for the plan as in the short-term farmers could see their shares' value increase, but he urged shareholders to consider the long-term implications.
Fellow MG supplier Andrew Wilson, Strathmerton, said the shareholders had forced management's hands by saying they would not provide the $500 million needed to grow the business and add value to it.
"I think the restructure is a necessary evil that needs to be done so the company can compete in the changing marketplace," Mr Wilson, who now milks 190 cows, said.
"Like any business, even a farm, you have to spend money to make money, but it is a big thing they are doing."
He said farmers would have a smaller share of ownership and perceived control but it was not necessarily a bad thing that the business could be more objectively valued by a share price.
