Over 70 percent of Class B depositary receipts converted into member bonds

25 September 2008

Adjustment of Friesland Foods capital structure complete

Friesland Foods completed the conversion of depositary receipts for Class B shares into member bonds-free (i.e. bonds freely tradable on the internal market) and/or cash on 25 September 2008. Member dairy farmers and members who have stopped farming opted to have 71 percent of the value of their depositary receipts for Class B shares converted into member bonds-free and 29 percent into cash. The value of the issued member bonds, including interest accrual since 1 June 2008, was 294.4 million euros (for 5,749,175 bonds). The cash payment totalled 119.6 million euros.

Sybren Attema, Chairman of the Board of Zuivelcoöperatie Friesland Foods, is happy with the outcome of the conversion. Says Attema: “The cooperative needs to continue to secure capital resources on its own steam. That is how we, as dairy farmers, can carry on to fully own the business, without losing our independence. The outcome of the conversion shows that the member farmers and the former farmers feel the same way. Their choice to convert 71 percent into member bonds has kept us well below the prescribed cap for cash payments. This is a pleasing result.”

Member bonds-free
A member bond-free currently bears 7.4 percent interest. The interest is based on six-month Euribor (currently 4.9 percent) plus a 2.5-percent mark-up. Interest is due annually in arrears on 1 June. As indicated above, the bonds are called member bonds-free because they are freely tradable on the internal market of members and former members (who have stopped farming) of Friesland Foods. A bond’s par value is 50 euros, which is a fixed price. The member bonds-free can be traded for 50 euros plus interest accrued since 1 June prior to the purchase or sale on the internal market. Friesland Foods has engaged Rabobank Nederland to organise its internal market. This year’s last trading day will be on 20 November 2008. No more than six trading days will be held in 2009. Friesland Foods reviews once every three years whether the mark-up on the interest should be adjusted to the situation on the external financial market, the company’s financial position and the effectiveness of the internal market.

A member bond-free is a perpetual bond, i.e. there is no end date. This means that Friesland Foods is not under any obligation, in principle, to redeem the bond. As a result, the value can be added to Friesland Foods’ equity. Based on a cash payment of 119.6 million euros and a dividend withholding tax remittance of 36.9 million euros, equity will drop by 157 million euros in total, pushing the solvency ratio down from 36.9 to 31.7 percent (based on the half-year figures for 2008). Friesland Foods more than complies with the requirements imposed by lenders.

Capital structure
The member bonds have replaced the depositary receipts for Class B shares. This conversion took place after the Annual General Meeting had consented to a proposal by the Board and the Board of Management to adjust the capital structure of Royal Friesland Foods. The adjustment was motivated by the increasing imbalance in the dividend spread over Class A shares (which was linked to milk supplies) and (depositary receipts for) Class B shares; as a result of the methodology, more and more dividend was being distributed proportionally on (depositary receipts for) Class B shares. As the Board and the Board of Management found this to be an unwelcome development, it was decided to adjust the capital structure such that Friesland Foods’ dividend distributions would be linked fully to milk supplies via Class A shares