A dairy industry investment company is watching with interest the class action being considered by a Dunedin law firm over Fonterra's decision to slash the value of its shares, which has potentially wiped off millions of dollars in equity.
Listed company Dairy Equity Ltd (DEL), which invests in Fonterra fair value shares, warned yesterday that Fonterra's proposal to retain an estimated 30c a kg of milk solids from this year's record payout, along with an 18% drop in its share value, would prove costly to DEL and farmers selling their Fonterra shareholding.
Along with the vast sums of money involved, this warning from DEL and the court action being considered by Rodgers Law on behalf of clients also raised questions about the way Fonterra communicated with shareholders.
Traditionally, the dairy co-operative has issued regular milk price and share value forecasts.
But a March forecast increase in the share value from $6.79 to $7.01 - which failed to materialise - has provoked this dispute with DEL and farmers.
Former Southland dairy farm owner Greg Roberts sold his 400-cow farm this year and said advice from Fonterra encouraged him to keep hold of the shares until the new, and expected higher value, was announced in May.
But, in a move which caught everyone by surprise, the value dropped to $5.57, which Mr Roberts said cost him $200,000.
Dunedin lawyer Pieter Brits, of Rodgers Law, said the firm was still considering class action on behalf of Mr Roberts and other dairy farmers.
DEL chairman Peter Jensen said he would watch with interest, but added he was not keen on spending money on legal fees.
In a press statement to the Otago Daily Times yesterday, Mr Brits said he had had "a number of inquiries" and continued get fresh interest from farmers.
"We have decided to investigate to fully determine the facts and law and whether those people have a claim."
Mr Jensen said Fonterra's retention of 30c a kg of the value-added component (VAC) of the milk payout would cost DEL $880,000, or 2c a share, while the sale of 2.25 million shares at the lower price would cost it another $625,000.
Mr Jensen said that withholding the VAC should have strengthened Fonterra's share price, not devalued it.
DEL was in the process of returning $29 million in cash to shareholders and after Fonterra's market update, DEL warned that the net asset backing of its 45.7 million shares on issue would fall by 4.6c to about 45c a share.
DEL still expected to make a profit.
A Fonterra spokeswoman said that under the provisions of the Dairy Industry Restructuring Act 2001 and Fonterra's constitution, the value of a Fonterra share for a season was set by the board within a range advised by an independent valuer.
"The board set the share price in May for the 2008-09 season at $5.57 having regard to all relevant information known to it at the time.
"This included the board's announced intention to retain about 30c from payout, and knowing that it was not possible to revisit the final 2008-09 share price."
DEL was not a shareholder of Fonterra and therefore Fonterra would not engage with the company on shareholder-related issues, the spokeswoman said.
