Australian dairy co-operative Murray Goulburn is considering allowing external investment in the co-operative, as part of its capital structure review, which has been conducted over the last nine months.

Raising equity from external investors was one of several alternatives considered as part of the review, Murray Goulburn shareholders were told at the co-operative’s annual general meeting on Friday 22 November 2013. Other options considered included increasing bank debt, off balance sheet funding, retention of profits and raising additional equity from farmer shareholders.

Shareholders were advised at the AGM that the Board intended to develop and is likely to recommend members of the co-operative adopt an “enhanced capital structure” that maintains 100 per cent farmer control, but allows external investment in Murray Goulburn.

Proposed structure likely to be similar to Fonterra

Murray Goulburn said the establishment of an ASX-listed unit trust, similar to the one successfully implemented by New Zealand dairy co-operative, Fonterra, was considered “logical and appropriate given the balance it provided in meeting the capital needs for growth while maintaining supplier focus and control”.

Murray Goulburn said the Co-operative had undertaken the comprehensive review of its capital structure in light of the “significant growth opportunities emerging”, particularly as a result of rising demand in export markets.

“In pursuing growth for Murray Goulburn, our core objective is to significantly increase underlying farmgate returns,” said Gary Helou, Managing Director Murray Goulburn. “We believe increasing the underlying farmgate returns by $1 per kilogram of milk solids by financial year 2017 will deliver the level of return Murray Goulburn supplier/shareholders require to have confidence to invest in their farm businesses and grow milk production,” he said.

“In addition to enhancing our capital structure through access to mainstream capital markets, a Trading Among Farmers type platform, similar to that recently implemented by Fonterra, will also provide a clear and observable market value for Murray Goulburn dairy farmer-held shares,” Mr Helou said.

“This will mean that equity in Murray Goulburn can be practically applied to strengthen individual farm balance sheets and in doing so increase investment in individual farm businesses,” Mr Helou said. “This also means there will be potential for value creation in line with public market values, and from realisations of existing individual shareholdings,” he said.

Murray Goulburn said the model being considered followed a “thorough review” of the capital options available to Murray Goulburn to pursue international growth opportunities and was considered “the most balanced way forward”.

“The co-operative structure is at the heart of our success and we want to reassure all supplier shareholders that we are not proposing any change to it,” said Phil Tracy, Murray Goulburn Chairman. “What we are likely to recommend is a funding model that retains 100 per cent farmer control, but allows external investors to invest into Murray Goulburn. Such a model would put Murray Goulburn in a strong position to pursue the growth opportunities we have availble to meet our objective of lifting farmgate returns,” he said.

“Over the past nine months we have carefully reviewed and considered a wide range of options and we now believe that the model being considered is a logical and prudent next step,” Mr Tracy said. “We believe this is a conservative approach to raising capital and this structure would be expected to have a significant and direct positive impact for the co-op and its supplier/shareholders,” he said.

Next steps in the capital structure review

Murray Goulburn said it would be visiting all supplier regions in late November 2013, December 2013 and January 2014 to consult directly with supplier/shareholders on the proposed capital restructure, what it means for them and why the Board is recommending the model.

In addition, Murray Goulburn said there were also a number of steps it will take into account in 2014 before it can proceed to implementation. These include:

• Undertaking a  detailed development of the proposed capital restructure in the coming months, including engagement with the various regulators that will be required to approve the restructure

• Following the first round of consultation meetings with supplier/shareholders in December/January, Murray Goulburn will hold a further round of supplier meetings in March 2014 to discuss in full the final proposed structure

• An Extraordinary General Meeting will be held in May 2014 for shareholders to vote on the model

Murray Goulburn said supplier/shareholders will be kept up to date with each stage of the process.

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