Fonterra’s problems are clearly illustrated in the accompanying table. The dairy co-operative has made limited progress with value-added consumer products, and its cost structure has grown too rapidly for an organisation that relies mainly on commodity products.


In the 1980s and 1990s, when the New Zealand sharemarket was dominated by large forestry commodity producers, analyst reports placed a great deal of emphasis on costs.

These reports compared the cost structure of New Zealand pulp and paper producers with companies in the northern hemisphere, Australia, South Africa and Chile.

Our listed pulp and paper producers were price takers rather than price makers and were competitive, particularly in soft markets, only if their cost structure was lower than other international pulp and paper producers.

One of the major issues with Fonterra is that it is still predominantly a commodity producer, as its consumer (non-commodity) sales have increased by only 18 per cent, from $3.8 billion to $4.5 billion, in the past eight years.

Over the same period, its collection of New Zealand milk solids has grown by 31 per cent,
so commodity products are now 80 per cent of the co-op’s revenue compared with 71 per cent eight years ago.

Commodity producers have two main options. They can focus on commodities — with the clear objective of being an extremely low cost operator — or try to add value through consumer products.

Fonterra is becalmed somewhere between these two objectives.

The first issue with the dairy co-op is its Auckland head office which results in a high salary structure, partly because of the soaring cost of residential property in the city. In the past eight years the number of Fonterra employees being paid $100,000 or more a year has soared 205 per cent, from 1371 to 4176.

This is an unsatisfactory development for a commodity producer as the administration offices of these companies should be in rural areas where salaries and costs are lower.

The co-op recently announced the disestablishment of 523 jobs at a one-off cost of between $12 million and $15 million. This will give annual payroll savings of $55 million to $60 million.

This indicates redundancy costs in the range of $22,900 to $28,700 an employee and annual salaries in the $105,200 to $114,700 range.

As the co-op’s employee remuneration statistics include redundancy payments, we can expect the $100,000 plus figure to be above 4176 in the 2015 annual report. The figure will also be boosted because the salaries of overseas Fonterra employees are translated into New Zealand dollars and the kiwi has declined in value.

It is surprising that a farmer-dominated board has allowed Fonterra to develop such a high, city-based cost structure and the disestablishment of 523 jobs is not a permanent solution for the co-op.

It has to either focus on its commodity business, and substantially reduce its cost structure, or materially develop its value-added consumer business.

Forestry analysts in the 1980s and 1990s would have been highly critical of Fonterra for its high cost structure and its inability to make significant progress with its consumer products business.

Substantial Security Holder Notices

Substantial Security Holder (SSH) notices are an important feature of the stock exchange as they keep investors informed about sales and purchases by major shareholders.

The main requirement of these SSH notices is that all shareholders owning 5 per cent or more of a listed company must immediately notify the NZX when their shareholding moves up or down by 1 per cent or more.

With this in mind, there was a large amount of market chatter after Snakk Trustees lodged a SSH notice on July 16 disclosing that its VMob shareholding had declined from 12.34 per cent to 4.81 per cent since 2012.

Snakk Trustees is owned by John Sorensen who has been involved in a number of controversial back door listings.

VMob was incorporated as Australasian Breeding Stables in mid-1984 and listed on the NZX shortly after.

In 1987 it divested its bloodstock operations and changed its name to Strathmore Group. It made little progress over the next few years and in 1999 was restructured into a venture capital fund focusing on high growth technology businesses.

The company was adversely affected by the Nasdaq collapse in 2000 and divested its technology businesses two years later.

In December 2003, it was used as a backdoor listing for Digital Disc Holdings and two months later changed its name to Media Technology Group.

In 2010 the company was renamed Forge Media Group.

The Digital Disc business was unsuccessful, and was sold for $186,000 in mid-2011. Shortly afterwards the NZX-listed company changed its name to Velo Capital.

Thus over 27 years the company had five names and numerous businesses, none of which were successful over an extended period.

On September 6, 2011, Velo announced it would acquire all the shares in VMob for $4,363,000.

The consideration was 609,000,000 Velo shares at 0.7c each, plus $100,000 cash. This was the backdoor listing of VMob through Velo with the original Velo shareholders holding just 2.9 per cent of the company after the reverse listing was completed.

VMob described itself as “a company focussed on helping mobile network operators provide their customers with the next generation of value added services”.

This description was not totally dissimilar to the profile of Plus SMS, a hugely controversial back door listing through RetailX in 2005.

Another similarity between Plus SMS and VMob is John Sorensen who owned 10.16 per cent of Plus SMS, through EJB Limited, after its backdoor listing in 2005. Sorensen also owned 12.34 per cent of VMob, through Snakk Trustees, after the company’s reverse listing.

The 2006 Plus SMS annual report showed that EJB’s shareholding had fallen from 10.16 per cent to 8.61 per cent and two years later it had declined to 6.93 per cent.

The 2009 Plus SMS annual report showed EJB owed 5.21 per cent of the company and Company Office records disclose that EJB’s shareholding was 4.76 per cent when the former NZX-listed company was struck off in 2012.

EJB did not lodge any SSH notices with the NZX after its initial 10.16 per cent disclosure in 2005.

Velo’s acquisition of VMob, announced in September 2011, was completed 11 months later and the listed company changed its name to VMob. Shortly afterwards Sorensen’s Snakk Trustees issued a SSH notice disclosing that it owned 12.34 per cent of the listed company.

VMob’s 2013 annual report showed that Snakk’s shareholding had fallen to 11.44 per cent, a sale that did not require a SSH notice because it was less than a 1 per cent reduction.

However, VMob’s 2014 annual report disclosed that Snakk’s holding had declined to 7.63 per cent and the 2015 annual showed it had fallen to just 5.45 per cent.

Five weeks after the release of VMob’s 2015 annual report, Snakk Trustees lodged a SSH notice revealing that its shareholding had fallen to 4.81 per cent. This was the first SSH notice lodged at the NZX by Snakk Trustees since its 12.34 per cent disclosure in August 2012.

Market regulators believe the SSH disclosure requirements are important and should be complied with by all shareholders, even shareholders of small back door listed companies.

Brian Gaynor

Portfolio Manager

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.