THIS IS AN IMPORTANT DOCUMENT AND REQUIRES YOUR IMMEDIATE ATTENTION.

Transcription

1 Murray Goulburn Co-operative Co. Limited Capital Structure Booklet and Notices of Meetings to Shareholders and Preference Shareholders of Murray Goulburn THIS IS AN IMPORTANT DOCUMENT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT ABOUT HOW TO DEAL WITH THIS DOCUMENT, YOU SHOULD CONTACT YOUR BROKER, FINANCIAL ADVISER OR LEGAL ADVISER IMMEDIATELY.

2 Contents 1. Overview of the proposed Capital Structure 7 2. Why does Murray Goulburn need a new Capital Structure? Objectives of proposed Capital Structure Murray Goulburn s vision and corporate strategy How the Capital Structure supports Murray Goulburn s corporate strategy Key elements of the proposed Capital Structure The Unit Trust and the IPO The Share Standard Shareholder Trading Platform Changes to Murray Goulburn s share capital Farmgate Milk Price and the Profit Sharing Mechanism Changes to Constitution Advantages and Disadvantages of the Capital Structure Effect of Capital Structure on composition of Supplier returns Advantages of the Capital Structure Disadvantages of the Capital Structure Tax implications Warning Existing Shares and Preference Shares Supplier Shareholder Offer Supplier Priority Offer Tax treatment of dividends Tax File Numbers ( TFNs ) Other information Regulatory and third party consents Alternatives to the Capital Structure considered by the Board Implications if the Capital Structure is not approved Timetable for implementation Independent Expert s Reports Proposed changes to Murray Goulburn s Constitution Implementation of the Share Standard Replacement of Preference Share provisions Changes to conversion mechanics 41 Attachment 1 Notice of Extraordinary General Meeting 42 Attachment 2 Notice of Class Meeting for B Class Preference Shareholders 50 Attachment 3 Notice of Class Meeting for C Class Preference Shareholders 56 Attachment 4 Independent Expert s Report for Ordinary Shareholders 62 Attachment 5 Independent Expert s Report for Preference Shareholders 116 Attachment 6 Glossary 153 Murray Goulburn Co-operative Co. Limited ABN Registered Office: Level 15 Freshwater Place, 2 Southbank Boulevard, Southbank Victoria 3006

3 Letter from the Chairman to Shareholders Dear fellow shareholder It is with pleasure that I invite you to attend an Extraordinary General Meeting (EGM) of Murray Goulburn Co-operative Co. Limited (Murray Goulburn), convened so that shareholders can come together to define Murray Goulburn s future and vote on the recommended capital structure. The EGM will be held at the RACV City Club, Level 17, 501 Bourke Street, Melbourne at 11.00am (AEST) on Friday, 8 May I also invite preference shareholders to attend a meeting of B class preference shareholders or C class preference shareholders (as applicable) to be held following the EGM. After more than 12 months of consultation and discussion, Murray Goulburn has arrived at a historic moment. At stake is our ambition to be a world-class dairy foods business for generations to come. If implemented, the recommended capital structure will ensure Murray Goulburn has the strong foundations and stable capital base required to pursue growth opportunities and deliver a sustainable increase in the farmgate milk price for suppliers. Your Board believes the recommended capital structure will be transformative for Murray Goulburn, providing Murray Goulburn with approximately $500 million of capital to support its growth strategy to improve farmgate returns, market reach and fund investments in world leading manufacturing capability to meet and serve the growing needs of dairy customers and consumers in Australia and internationally. The Board has undertaken extensive reviews in its quest to develop and design the most appropriate, effective and efficient capital structure for Murray Goulburn and we believe the recommended capital structure will deliver many benefits including: Ensuring suppliers retain 100 per cent control of Murray Goulburn Reducing Murray Goulburn s reliance on debt funding Providing suppliers with a market price for their Murray Goulburn shares Strengthening supplier balance sheets by facilitating the recognition of the value of Murray Goulburn shares as an asset by lenders to suppliers Helping to fund Murray Goulburn s growth strategy of Operating Excellence and Innovation to deliver a sustainably higher farmgate milk price Ensuring Murray Goulburn not only remains competitive with other processors, both domestically and internationally, but transforms to become the first choice dairy foods company for its farmers, customers and consumers The proposed structure strongly aligns Suppliers and external investors to maximise growth in the milk pool for the benefit of all stakeholders. The attached booklet includes an independent expert s report that concludes that the proposed capital structure is in the best interests of shareholders as a whole. If the capital structure is approved by shareholders, the Board will determine the manner in which it will be implemented. Certain aspects of the capital structure may need to be varied by the Board, for example to meet regulatory or other requirements. The Board is unlikely to implement the capital structure if the price at which units are to be offered to investors pursuant to the proposed initial public offering does not represent a premium to the maximum price at which suppliers are offered shares under the Supplier Share Offer (being $1.24 per Share). If the capital structure is implemented suppliers will have the opportunity to acquire additional shares in Murray Goulburn under a Supplier Share Offer and a Supplier Priority Offer. Summaries of these offers are included in the attached booklet. Full details will be included in the offer documentation in due course. 1

4 Letter from the Chairman to Shareholders continued In addition to seeking shareholder support for the capital structure, a number of additional items of business are being put forward by the Board at the EGM, being amendments to Murray Goulburn s constitution, the consolidation and conversion of B and C class preference shares and an increase in aggregate fees payable to non-executive Directors. Constitutional amendments A number of Constitutional amendments relating to the proposed capital structure are being proposed. These are set out in more detail in the attached booklet and are conditional on the capital structure being implemented. Consolidation and conversion of the B and C class preference shares As foreshadowed at the Annual General Meeting (AGM) in November 2014, it is proposed that the B and C class preference shares currently on issue be consolidated and converted into non-voting shares. This change is conditional on the capital structure being implemented and will allow some of the benefits of the proposed capital structure to be extended to B and C class preference shareholders. Fees payable to non-executive Directors Directors fees were last reviewed in The Board commissioned Ernst & Young (EY) to undertake a benchmarking review of Murray Goulburn s non-executive directors fees against a comparator group of companies listed on the Australian Securities Exchange (ASX). EY s review highlighted that the fees currently paid to Murray Goulburn s non-executive Directors are well below the respective median positions for ASX comparator group companies. It is therefore proposed to increase the fee pool for non-executive Directors by $700,000 to a total of $2,000,000 per annum to bring Murray Goulburn s fee structure into line with the comparator group companies. Directors recommendations Your Board considers that the resolutions relating to the new capital structure, constitutional amendments and the consolidation and conversion of preference shares to be presented at the EGM are in the best interests of shareholders and unanimously recommends that you vote in favour of those items of business. Supplier Directors intend to vote all of their shares in favour of those items of business. As each non-executive Director has an interest in the resolution to increase the aggregate fees paid to non-executive Directors, the Board does not make a recommendation in relation to that resolution. Meetings of B and C class preference shareholders Immediately following the EGM, the Board will convene meetings of the B and C class preference shareholders so that each class of preference shareholders can approve any variation of their class rights resulting from the changes to the constitution and the consolidation and the conversion of their preference shares. The attached booklet includes an independent expert s report that concludes that the consolidation and conversion of the B and C class preference shares in the manner proposed is fair and reasonable to B and C class preference shareholders. The Board also considers that the variation of rights is fair and reasonable to B and C class preference shareholders and recommends that they vote in favour of the item of business presented at their respective meetings. Attending the EGM Given the significance of the EGM in determining the future direction of Murray Goulburn, I encourage all shareholders to take advantage of this opportunity to vote on the resolutions presented by either attending the meeting in person or completing the enclosed proxy form and returning it as outlined in the notice of EGM. In the meantime, if you have any queries or questions regarding the meeting or the resolutions to be considered please do not hesitate to contact our dedicated information line on (within Australia) or (outside Australia). I look forward to meeting many of you again at the EGM as we consider taking this important step to endorse the recommended capital structure for Murray Goulburn. Yours sincerely Philip Tracy Chairman 2

5 Proposed Timetable Event Notices of meeting and Capital Structure booklet provided to Shareholders and Preference Shareholders Supplier information sessions to be held (further details to be available on Murray Goulburn s website and communicated to Suppliers separately) Indicative Date 14 April April 2015 SSO prospectus sent to Suppliers 1 May 2015 Proxy forms must be received 6 May 2015 EGM of Shareholders 11.00am (AEST), 8 May 2015 Class meeting of B Class Preference Shareholders 1.00pm (AEST), 8 May 2015 Class meeting of C Class Preference Shareholders 1.15pm (AEST), 8 May 2015 SSO offer opens 8 May 2015 SSO offer closes 22 May 2015 Offer period for IPO and Supplier Priority Offer opens 9 June 2015 Offer period for IPO and Supplier Priority Offer closes 24 June 2015 B and C Class Preference Shares converted into Non-voting Shares 3 July 2015 Listing of Unit Trust on ASX (conditional and deferred trading) 3 July 2015 Shares may be traded on the STP (conditional and deferred trading) 3 July 2015 Trading of Units on ASX and Shares on the STP (normal settlement basis) 10 July 2015 Note: The Board reserves the right to amend any and all of the above dates in its absolute discretion. Important Voting Information for Shareholders Voting by proxy If you are not able to attend your relevant meeting but wish to vote, you must complete and return the enclosed proxy form, together with any power of attorney or authority under which your proxy is signed prior to: 11.00am (AEST) on 6 May 2015 for the EGM. 1.00pm (AEST) on 6 May 2015 for the class meeting of B Class Preference Shareholders. 1.15pm (AEST) on 6 May 2015 for the class meeting of C Class Preference Shareholders. Any proxy form received after the time described above for the relevant meeting will not be accepted. Voting in person at the relevant meeting Shareholders and Preference Shareholders attending their relevant meeting will need to register at the registration desk on the day. The registration desk will be open from 10.00am (AEST). Please ensure you have the following documentation with you: Individual shareholders may bring their proxy forms (enclosed) to facilitate registration. A company/corporate shareholder may vote by appointing an individual to act as its representative at the relevant meeting (generally by a resolution of the company s directors). The representative must bring the completed corporate representative appointment form (enclosed), duly executed on behalf of the relevant corporate shareholder, in order to vote on that shareholder s behalf. For further information regarding voting requirements for: Suppliers please refer to Information for Shareholders in Attachment 1. B Class Preference Shareholders please refer to Information for Preference Shareholders in Attachment 2. C Class Preference Shareholders please refer to Information for Preference Shareholders in Attachment 3. 3

6 Important Voting Information for Shareholders continued Frequently Asked Questions What is the proposed Capital Structure? What will happen to my Shares? What is my Share Standard? How can I sell my Shares? What price will I be able to sell my Shares for? Can I sell my Shares immediately upon the IPO? What is the difference between the SSO and the Supplier Priority Offer? Do I have to buy more Shares? How much money does Murray Goulburn intend to raise from the Capital Structure? How will Murray Goulburn use the money raised and what will be the expected benefit? The Capital Structure is being proposed to enable Murray Goulburn to raise funds from external investors to fund capital investments to enable the delivery of sustainably higher Farmgate Milk Prices (FMP) to Suppliers. The Capital Structure involves Murray Goulburn establishing the Unit Trust, a special purpose funding vehicle, which will be listed on the ASX. The Capital Structure will also introduce a Profit Sharing Mechanism to govern the setting of the FMP and establish the Shareholder Trading Platform (STP). If the Capital Structure proceeds your Shares will have a market price equal to the market price of Units on the ASX. See section 3.3. You will also have the opportunity to apply for more Shares under the Supplier Share Offer (SSO) and/or the Supplier Priority Offer. See sections and Your Share Standard is the number of Shares you are expected to hold given the quantity of milk solids you supply to Murray Goulburn on an annual basis, up to a maximum limit of 0.5 per cent of Murray Goulburn s share capital. See section 3.2 for details. Provided you continue to satisfy your Share Standard, you can sell your Shares on a private on-line trading platform, known as the Shareholder Trading Platform. See section 3.3. You will be able to sell your Shares at the prevailing market price, which will be equal to the price at which Units trade on the ASX. See section You may be able to sell some of your Shares but you cannot sell down below your Share Standard. In addition, a three-year sell down rule applies in certain circumstances. See section Under the SSO, eligible Suppliers who are below their Share Standard can acquire Shares up to their Share Standard at a price between $1.00 $1.24. Under the Supplier Priority Offer, all Suppliers can acquire additional Shares at the IPO price up to a maximum ownership limit of 1,600,000 Shares. See sections and No. Participation in the SSO and the Supplier Priority Offer will be voluntary. However, if you are below your Share Standard after the Capital Structure is implemented you will be required to continue to participate in Murray Goulburn s Share off-take under similar arrangements but with Shares acquired at the prevailing market price, rather than $1.00 per Share. See section There will be three capital raisings the SSO, the Supplier Priority Offer and the IPO. In aggregate, Murray Goulburn expects to raise approximately $500 million but the size of each offering will depend on factors including Shareholder and external investor interest. See sections 2.1, 2.2 and The funds raised will be spent on a number of new capital projects, debt reduction and operational improvements with the ultimate objective of increasing the FMP. See section 2. 4

7 Frequently Asked Questions continued What is the IPO? What will the IPO price be? How will the FMP be impacted? What level of dividends will I receive from my Shares? Will the Unitholders be entitled to receive any dividends declared by the Board for the 2015 financial year? How will the Capital Structure impact new Suppliers joining Murray Goulburn? How will the Capital Structure encourage Suppliers to stay with Murray Goulburn? Will Unitholders have any control over Murray Goulburn? Will there be a cap on the size of the Unit Trust or on the number of Units a Unitholder can hold? It is the initial public offering of a Unit Trust on the ASX in which investors can purchase Units. Under the Constitution, Murray Goulburn itself cannot be listed. Unitholders will have an economic exposure to Murray Goulburn s business, but will not have any voting rights in relation to Murray Goulburn or its operations. See section The IPO price will be determined shortly before Units are listed on the ASX. The Board is unlikely to implement the proposed Capital Structure if the IPO price does not represent a premium to the maximum price at which Shares are offered under the SSO (being $1.24 per Share). See section The Capital Structure will allow Murray Goulburn to pursue important growth initiatives, with the aim of increasing the FMP, although the FMP could be adversely impacted in the short-term as a result of the application of the Profit Sharing Mechanism. See sections 3.5 and Dividends will be decided by the Board in accordance with the Profit Sharing Mechanism. Generally, dividends will be positively correlated to movements in the FMP. See section 3.5. No. A decision on whether to declare a dividend for the 2015 financial year will be made by the Board after the full year accounts are finalised. See section New Suppliers will join Murray Goulburn on the same terms as today, but they will pay the market price for their Shares. See section It is intended that the Capital Structure will encourage Suppliers to remain with Murray Goulburn by providing them with an appropriate return through the FMP and dividends on Shares that they hold. Under the SSO some Suppliers will also be required to agree to remain with Murray Goulburn for up to three years. See sections and 3.5. No. Unitholders will not have any control over Murray Goulburn, its strategies or operations. See section There is no cap on the size of the Unit Trust. Like any ASX-listed entity, an investor owning 5 per cent or more of the Unit Trust must disclose their holding to the ASX and any foreign investor seeking to own more than 14.9 per cent would need to comply with the requirements of the Foreign Acquisition and Takeovers Act. To acquire more than 20 per cent, an investor would need to make a takeover offer for the Unit Trust (or rely on an exemption to the takeover laws). See section

8 Important Voting Information for Shareholders continued Frequently Asked Questions continued What happens if the Unit Trust is taken over? What is the opinion of the Independent Expert on the Capital Structure? What will happen to B and C Class Preference Shares? What is the opinion of the Independent Expert on the consolidation and conversion of Preference Shares? If a Unitholder acquires control of the Unit Trust, it will not give them control rights over Murray Goulburn nor the right to vote on the appointment of any director of Murray Goulburn or to vote on any strategic and operational decisions associated with Murray Goulburn s business. If a Unitholder was to acquire substantially all of the Units in the Unit Trust, it would likely impact liquidity in the Unit market, which would affect Shareholders ability to trade Shares on the STP. Such a Unitholder may also seek to change the Responsible Entity of the Unit Trust. See section The Independent Expert has concluded that the Capital Structure is in the best interests of Shareholders as a whole. See Attachment 4. If the Capital Structure is approved by Shareholders, and B and C Class Preference Shareholders approve the variation of their class rights, all B and C Class Preference Shares will be consolidated and converted to Non-voting Shares. If the approval of either class of Preference Shares is not obtained then that class of Preference Shares will remain on issue on their current terms. See section The Independent Expert has concluded that the consolidation and conversion of Preference Shares is fair and reasonable to Preference Shareholders. See Attachment 5. 6

9 1 Overview of the proposed Capital Structure Murray Goulburn proposes to adopt a new capital structure (Capital Structure) that contains a number of key elements set out below. Impact on Murray Goulburn s share structure The Unit Trust and the IPO The Shareholder Trading Platform The Supplier Share Offer and the Supplier Priority Offer The proposed Capital Structure will not make significant changes to the ordinary share structure of Murray Goulburn. Murray Goulburn will continue to be 100 per cent controlled by Suppliers and the current 0.5 per cent maximum share ownership limit will remain. Suppliers will be required over time to comply with the Share Standard, which will require that they hold one Share for each kilogram of milk solids that they supply to Murray Goulburn (assessed on the basis of a three-year rolling average). Suppliers who do not meet their Share Standard will stay on Murray Goulburn s Share off-take arrangements and continue to acquire additional Shares until they satisfy their Share Standard. Murray Goulburn proposes to create a Unit Trust, a separate legal structure, that will issue Units to investors pursuant to an IPO. The Units will be listed on the ASX. Unitholders will be entitled to receive distributions equivalent to any dividends or other distributions paid to Shareholders in Murray Goulburn. The Units being offered will be issued by the Unit Trust, not by Murray Goulburn, and will not confer any direct interest in Murray Goulburn. Unitholders will not have any voting rights in relation to the operations or affairs of Murray Goulburn. Murray Goulburn also proposes to create a private trading platform, to be known as the Shareholder Trading Platform (STP), that will allow Shareholders to trade their Shares subject to the Share Standard and the STP terms and conditions. The STP has been designed so that Shares will trade at the same market price that Units trade on the ASX. Prior to the IPO, Suppliers will be given the opportunity to acquire additional Shares pursuant to the SSO. Following the SSO, Suppliers will be given the opportunity to participate in the Supplier Priority Offer. Under the SSO, eligible Suppliers will be able to acquire Shares up to the lower of their Share Standard and 1,600,000 Shares for a price between $1.00 and $1.24 per Share depending on how long they have been a Supplier to Murray Goulburn. The Supplier Priority Offer will be open to all Suppliers including those who would like to acquire Shares above their Share Standard (which will be Non-voting Shares) up to the maximum ownership limit of 1,600,000 Shares. The price for Shares under the Supplier Priority Offer will be the same as the price for Units under the IPO. These and other elements of the proposed Capital Structure are explained in more detail in this booklet, together with the advantages and disadvantages of the Capital Structure. If the proposed Capital Structure is approved by Shareholders then the Board will determine the manner in which it will be implemented. Elements of the Capital Structure may need to be changed by the Board in its discretion, including to meet regulatory or other requirements. The Board is unlikely to implement the Capital Structure if the price at which Units are to be offered pursuant to the proposed IPO does not represent a premium to the maximum price at which Suppliers are offered Shares under the SSO (being $1.24 per Share). 7

10 2 Why does Murray Goulburn need a new Capital Structure? 2.1 Objectives of proposed Capital Structure Murray Goulburn is currently executing a growth and value creation strategy in order to deliver sustainably higher Farmgate Milk Prices (FMP) and future earnings through investment in higher-value-add products, improving operational efficiencies and innovation. Murray Goulburn s growth strategy requires an investment of $550 million to $635 million in its dairy foods manufacturing footprint to provide it with low cost processing capability and improved flexibility to adapt to changing customer and consumer demand. The purpose of the proposed Capital Structure is to enable Murray Goulburn to fund its corporate strategy, as outlined below, while simultaneously meeting the following key objectives: delivering superior earnings and sustainably higher FMP; retaining 100 per cent Supplier control of the co-operative; reducing Murray Goulburn s reliance on debt funding; creating a market value for Shares through the operation of the STP; strengthening Suppliers balance sheets by facilitating the recognition of the value of Shares as an asset; and sustaining Murray Goulburn s international competitiveness and connectivity to key Asian growth markets. 2.2 Murray Goulburn s vision and corporate strategy Promoting industry growth Murray Goulburn is very focused on maximising farmgate returns to its Suppliers, in order to encourage existing and new Suppliers to invest in their operations and to profitably grow their milk production. The Capital Structure is a key step in strengthening Murray Goulburn s ability to continue to successfully pursue its growth strategy. The Capital Structure is designed to provide an observable market value for Shares, while maintaining 100 per cent Supplier control of Murray Goulburn and introducing external investment into Murray Goulburn. Providing a market value for Shares should assist in strengthening Supplier s balance sheets and encourage continued industry investment into the expansion of milk supply, for the benefit of Suppliers and Unitholders. The Profit Sharing Mechanism outlined in section is designed to provide alignment of interests between Suppliers and Unitholders by focusing on maximising the size of the milk pool Murray Goulburn s vision and strategy Murray Goulburn s vision is to be the first choice dairy foods company for its Suppliers, customers and consumers. To support this vision, Murray Goulburn is focusing on two key strategic areas to drive performance: Operational Excellence to make operational enhancements to the business that simplify and improve manufacturing efficiency and the dairy food supply chain; and Innovation to drive the ongoing shift to higher value products in the key growth categories of nutritional powders, consumer cheese and dairy beverages Operational Excellence Murray Goulburn has been investing significantly in its manufacturing footprint to provide it with enhanced and more efficient processing capabilities and improved flexibility to adapt to changing customer and consumer demand. Murray Goulburn s high quality people and systems manage the supply chain to minimise costs and optimise quality and output. Since 2012, Murray Goulburn has invested approximately $230 million to upgrade existing UHT, butter, cheese and infant nutrition processing facilities and to build state-of-the-art liquid milk processing plants in Melbourne and Sydney. In addition, more than $100 million in financial benefits from operational initiatives have been achieved since 2012 across a number of areas, excluding the impact of commodity prices, foreign exchange rate movements and inflation. 8

11 2.2.4 Innovation Murray Goulburn continually explores opportunities to innovate and improve its operations across its business. From new product development and packaging to distribution channels, innovation is critical to ensuring Murray Goulburn optimises its product mix and market reach. Murray Goulburn aspires to be the supplier of choice for consumers as well as supermarkets, the food service sector and ingredients customers across Australia, Asia and the Middle East. To date, as part of its focus on innovation Murray Goulburn has revitalised the Devondale and Liddells brands in Australia and has established an in-market presence in China, Singapore, Vietnam and the UAE Murray Goulburn s strategy in action Murray Goulburn has a diversified and balanced dairy foods portfolio, producing a range of dairy foods for customers and consumers in Australia and selected international markets, with revenues split between domestic and international markets. The portfolio is a mix of dairy ingredients, food service and consumer products (primarily under the flagship Devondale brand), providing a balance of product lines across milk powders, cheese, infant nutrition and drinking milk. The composition of Murray Goulburn s sales will vary from year to year with currency and commodity price movements and as processing needs change in order to optimise the product mix. In recent years, Murray Goulburn has actively focused on increasing its weighting towards value-added products, both domestically and internationally, with a reducing proportion of commodity production. This has enabled it to maintain highly competitive farmgate milk prices despite volatility in global dairy commodity prices. To demonstrate this shift, in the 2012 financial year ingredients represented approximately 61 per cent of the revenue from Murray Goulburn s products, while value-added dairy foods (including nutritionals) represented the remaining 39 per cent of revenue. In the 2015 financial year, value-added dairy foods (including nutritionals) are expected to represent approximately 54 per cent of revenue, a significant increase. Murray Goulburn is transitioning to produce a higher proportion of value-added goods Saleable product value FY12 FY15F 100% 80% 60% 40% 20% 39% 61% 54% 46% Dairy Foods (including Nutritionals) Ingredients Murray Goulburn s exposure to commodity prices is declining 0% FY12 FY15F Murray Goulburn s milk volume growth Murray Goulburn s sales volume growth Milk intake (million litres) 3,800 FY12 FY15 CAGR: 6.7% Includes MG's majority owned subsidiary, 3,600 Tasmanian Dairy Products Co Ltd. 3,400 3,200 3,000 2,800 2,600 2,400 2,200 Sales (thousand tonnes) FY12 FY15 CAGR: 8.6% 2,000 FY12 FY13 FY14 FY15F 600 FY12 FY13 FY14 FY15F 9

12 2 Why does Murray Goulburn need a new Capital Structure? continued Murray Goulburn s strategy in action continued Murray Goulburn has continued to grow its international presence, particularly in emerging markets, and is now estimated to be the third largest importer of UHT in China. In addition, with a number of processing sites and existing spare capacity, Murray Goulburn has the ability to adjust its product mix to respond to favourable pricing and demand in different product markets. The Capital Structure is designed to provide funding to Murray Goulburn to pursue its strategy while retaining 100 per cent Supplier control of Murray Goulburn. To successfully deliver on its strategy, Murray Goulburn is focused on: continuing to successfully grow milk supply in order to capitalise on the existing and projected demand for value-added dairy food products in Australia and Asia; securing new suppliers and encouraging existing Suppliers to increase production by paying a competitive and increasing FMP; implementing a capital structure that enables it to continue to invest in upgrading and expanding its processing and supply chain capabilities; and continuing to pursue Operational Excellence and Innovation (as described above) Investing for growth Since 2012, Murray Goulburn has been implementing its strategy for Operational Excellence and Innovation. This has resulted in financial benefits of over $100 million being achieved through lower operating costs and improved value-add product margins. Further opportunities to improve efficiencies and increase innovation capabilities exist in the key growth categories of consumer cheese, dairy beverages and nutritional powders. However, Murray Goulburn believes that to best execute its strategy for enhanced manufacturing and supply chain capabilities to better connect with its domestic and international markets, a number of additional capital investments are required in addition to the capital projects which have recently been completed or are already underway. The proposed Capital Structure provides Murray Goulburn with a stronger capital structure and diversifies its funding from being reliant on traditional bank debt. The proposed Capital Structure positions Murray Goulburn to invest in a number of key capital projects (see below) as well as other opportunities that are targeted to deliver higher FMP and future earnings (and, therefore, greater returns to Suppliers and Unitholders). The total planned capital investment in the projects outlined below approximates $550 million to $635 million. The cheese and dairy beverage projects are targeted to commence in the next 12 months. The nutritionals investment is expected to commence within the next 12 months assuming sufficient off-take commitments are received from major global food companies. Each of the projects are targeted to deliver returns that exceed Murray Goulburn s cost of capital and will be milk price accretive. The Board intends to pursue each of these projects subject to: the Capital Structure being implemented; there being no material change in market conditions or the key underlying assumptions for each project; and in the case of the nutritionals project, off-take commitments at acceptable pricing being secured for nutritional powder products discussions with a number of global customers of nutritional powders are well advanced. To the extent that there are material changes to market conditions or, in the case of the nutritionals project, the requisite off-take arrangements are not secured, Murray Goulburn will pursue other opportunities for capital investment or acquisitions which are targeted to deliver returns that exceed Murray Goulburn s cost of capital and will be milk price accretive. 10

13 2.2.7 Summary of planned capital projects Project Description Approximate Capital Cost Commencement (construction period) Calendar Year Nutritional powders Increases capacity and enables production of infant/baby formulas that are more complex and attract higher margins $260m 300m 2016 (24 months) Dairy beverages Reduces UHT operating costs and increases volume output and production flexibility to meet expected international demand $165m 190m 2015 (18 months for stage 1) Cheese Reduces operating costs and increases production output and innovation capability in consumer and food service cheese applications $125m 145m 2015 (12 months initial investment) Nutritional powders. Murray Goulburn plans to invest an estimated $260 million to $300 million to expand production capacity in the nutritionals category. The investment includes the previously announced $37 million investment to increase nutritionals capacity at the Koroit and Cobram sites by approximately 50 per cent from the volumes in FY14. The $37 million investment is underway and is expected to be completed in the second half of calendar year The investment in nutritionals involves the construction and commissioning of a new nutritionals facility on the current Koroit site in Western Victoria. The facility is expected to be designed to produce growing-up milk powders, follow-on powders, infant formula, nutritional base powders, plus a range of premium whole and skim milk powders primarily for export markets in China, Indonesia and other Asian countries. The nutritionals investment is expected to commence within the next 12 months assuming sufficient off-take commitments are received from major global food customers. Dairy beverages. Murray Goulburn plans to invest $165 million to $190 million in a greenfield highly automated UHT dairy beverages production capacity and packaging capability to cater for growing Asian demand and evolving domestic and international consumer preferences. This investment is incremental to the previously announced $19 million invested at Leongatha in Victoria and the $14.5 million invested at Edith Creek in Tasmania, both of which will be completed in It is also incremental to the $160 million invested in the two highly automated daily pasteurised plants commissioned in 2014 to support Murray Goulburn s entry into the fresh milk segment. The investment into dairy beverages is planned to commence during the second half of 2015 and will upgrade and increase Murray Goulburn s UHT product capacity and flexibility. Cheese. An estimated $125 million to $145 million is planned to be spent at Murray Goulburn s Cobram facility in Victoria to deliver significantly improved technology for processing and packaging a range of consumer and food service cheese products including block, slices, snacking and shred. These products would be destined for Asian and Australian consumers and customers. The investment includes a previously announced $74 million investment to build a cheese cut and wrap facility at Cobram. This initial investment is expected to be completed within the next 12 months, with further developments spread over the next three calendar years. This will see Murray Goulburn continue its growth into the consumer and food service cheese categories utilising product and packaging innovation to drive market share growth in those categories. 11

14 2 Why does Murray Goulburn need a new Capital Structure? continued 2.3 How the Capital Structure supports Murray Goulburn s corporate strategy The proposed Capital Structure is fundamental to implementing Murray Goulburn s vision and providing superior returns to Suppliers. The Capital Structure is designed to facilitate investment to fund Murray Goulburn s growth strategy, reduce reliance on debt funding and ensure Murray Goulburn remains competitive, while maintaining 100 per cent Supplier control of Murray Goulburn and providing a market value for Shares. Although Murray Goulburn s management and Board considered a number of alternatives to the Capital Structure, it was concluded that these alternatives were inferior to the proposed Capital Structure for the reasons set out in section

15 3 Key elements of the proposed Capital Structure 3.1 The Unit Trust and the IPO The Unit Trust The Unit Trust will be a special purpose funding vehicle established by Murray Goulburn. It will be a separate legal structure and will be managed by a Responsible Entity (RE), which is a wholly-owned subsidiary of Murray Goulburn. The RE will hold an Australian Financial Services Licence (AFSL) to administer the Unit Trust. The Unit Trust will be a managed investment scheme and registered under the Corporations Act. The board of the RE will be the same as the Murray Goulburn Board and will include Murray Goulburn s Special Directors. The Unit Trust will hold two categories of assets, both of which will be securities issued by Murray Goulburn: Notes (perpetual, redeemable, unsecured, subordinated, non-cumulative notes); and Convertible Preference Shares. Notes and Convertible Preference Shares will each, as far as possible, carry the same economic rights as Shares and each other. Neither form of security will entitle the Unit Trust or Unitholders to vote at a general meeting of Murray Goulburn on strategic and operational decisions associated with Murray Goulburn s business. See section for further details of these securities. The Unit Trust will issue Units to investors pursuant to the IPO. The number of Units on issue in the Unit Trust at any time will equal the aggregate number of Notes and Convertible Preference Shares held by the Unit Trust. The Unit Trust will pass through to Unitholders any distributions and dividends it receives on the Notes and Convertible Preference Shares, which must be the same as any dividends paid to Shareholders. As a result, each Unit will have the same economic characteristics as a Share. The Unit Trust will also have on issue Non-participating Units which will be issued to the Market Facilitator for the purpose of rebalancing transactions. See section Simplified structure overview Murray Goulburn Dividends on Shares held by Shareholders Shareholders Distributions on Notes and dividends on Convertible Preference Shares held by Unit Trust Unit Trust Distributions on Units held by Unitholders Unitholders Dividend on 1 Share = Distribution on 1 Unit There will be no cap on the size of the Unit Trust. This will allow the Unit Trust to issue additional Units in the future to raise funds to support Murray Goulburn s growth initiatives. The Notes and Convertible Preference Shares will be held through a sub-trust of the Unit Trust. The trustee of that sub-trust will be a wholly-owned subsidiary of Murray Goulburn The Responsible Entity The RE s powers, rights and liabilities in relation to the Unit Trust will be governed by the Corporations Act, the Unit Trust s Constitution, the Continuous Disclosure Deed Poll, the Relationship Deed, the Profit Sharing Mechanism Deed and the terms of the Notes and Convertible Preference Shares. See section The RE will not determine the distributions payable on Units. The distributions paid on Units will be the same as the dividend paid on Shares, which will be determined by the Board applying the Profit Sharing Mechanism (see section 3.5). 13

16 3 Key elements of the proposed Capital Structure continued Unitholders voting rights The Board believes the co-operative structure is at the heart of Murray Goulburn s success. The proposed Capital Structure will not affect Suppliers control of Murray Goulburn. Neither the RE nor Unitholders will have the ability to control or vote on strategic and operational decisions associated with Murray Goulburn s business. These decisions will continue to be made by the Board as they are today. Unitholders will have no right to vote at any general meeting of Murray Goulburn and the Board of Murray Goulburn will continue to be elected by Suppliers The proposed IPO Although details of the IPO have not been finalised, Murray Goulburn estimates that the IPO, together with the SSO and the Supplier Priority Offer, will raise up to approximately $500 million. The price at which Units will be offered to the public will be determined shortly before Units are listed on the ASX, through an institutional bookbuild. Although it is not possible to give any guidance in relation to the likely IPO price at this time, the Board is unlikely to implement the proposed Capital Structure if the IPO price does not represent a premium to the maximum price at which Shares are offered to Suppliers under the SSO (being $1.24 per Share). An expected range for the IPO price will be stated in the offer documentation for the IPO and the Supplier Priority Offer. In addition to offering Units to investors, the Board intends to make a priority allocation of Units available to Friends of Murray Goulburn at the IPO price. At the time of the IPO, priority offers will be made to eligible current employees, eligible current and former Suppliers and local residents in Murray Goulburn s dairy regions. The Board wants to align and reward staff in line with the success of Murray Goulburn. Accordingly, as part of the IPO, Murray Goulburn intends to offer $1,000 worth of Units to eligible employees of Murray Goulburn at no cost to those employees. All full-time and part-time employees are eligible to participate, except for participants in Murray Goulburn s long-term incentive plan. The value of those Units will be pro-rated for part-time employees. Employees must hold those Units for at least 12 months from date of grant, after which time they can sell the Units. After the initial offer, the Board intends to make offers every six months to employees who were not employees at the IPO offer date but who meet the eligibility requirements and have attained 12 months service. On an annual basis, the Board will review the program and has discretion to renew or end the program at any time Payment of the financial year 2015 dividend After the IPO and upon finalisation of the financial statements for financial year 2015, the Board will consider whether to declare a dividend relating to the period prior to the IPO to holders of Shares on 27 April Shareholders who acquired Shares after 27 April 2015, including under the SSO, the Supplier Priority Offer or as a result of the conversion of Preference Shares, will not be entitled to this dividend in respect of those Shares. Unitholders will not receive a distribution in connection with this dividend Unit Trust s arrangements with Murray Goulburn Murray Goulburn will be responsible for the administration costs of the Unit Trust including ASX listing fees, director fees, registry fees and advisor fees and will provide the systems and resources necessary for the Unit Trust to meet its requirements as a listed entity and for the RE to meet its requirements as an AFSL holder. Murray Goulburn will also agree to provide the RE with all of the information the RE requires to ensure that it is able to meet its obligations under the ASX Listing Rules and the Corporations Act, including its continuous disclosure obligations. To manage this, the RE and Murray Goulburn will enter into the following agreements which are summarised below: Continuous Disclosure Deed Poll. This deed poll will be in favour of Unitholders, ASIC and any person who suffers loss or damage as a consequence of Murray Goulburn breaching its continuous disclosure obligations or this deed poll (each person being a beneficiary under the deed poll). As an ASX-listed managed investment scheme, the Unit Trust will be subject to the continuous disclosure requirements of the ASX Listing Rules. Given the economic relationship between the Unit Trust and Murray Goulburn through the Notes and Convertible Preference Shares and the control of Murray Goulburn s business and operations being with the Board, it is expected that most of the information that will have a material effect on the price of Units will relate to the performance and operations of Murray Goulburn. Murray Goulburn is best placed to know that information. 14

17 3.1.6 Unit Trust s arrangements with Murray Goulburn continued Murray Goulburn, as an unlisted disclosing entity, is subject to substantially similar continuous disclosure obligations under the Corporations Act as an ASX listed company, with a requirement to disclose information that would have a material effect on the price or value of its Shares. However, Murray Goulburn will not be required to disclose that information to ASX or Unitholders. Murray Goulburn will undertake in the Continuous Disclosure Deed Poll that once it is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of Units, Murray Goulburn must immediately tell the RE and the Shareholders that information. Murray Goulburn also undertakes to ensure that while the RE is a subsidiary of Murray Goulburn that the RE complies with its continuous disclosure obligations. Murray Goulburn will indemnify the RE for any penalties, compensation or damages order made against the RE as a result of a failure by the RE to comply with its continuous disclosure obligations as a consequence of Murray Goulburn breaching the Continuous Disclosure Deed Poll. Each beneficiary under the deed poll will be able to seek to enforce the deed poll against Murray Goulburn. Relationship Deed. The RE, in its personal capacity, will enter into the Relationship Deed with Murray Goulburn. Under the Relationship Deed: Murray Goulburn and the RE will agree that they will each provide to the other all information necessary for the other to meet its obligations to prepare full year and half year financial statements and all information reasonably required for the other party to meet its periodic disclosure obligations under the Corporations Act or ASX Listing Rules as applicable; Murray Goulburn and the RE will agree that they will coordinate their continuous disclosure functions and will implement a process of providing to the other, information that is, or may be, information that would have a material effect on the price or value of the other s securities for the purpose of them meeting their continuous disclosure obligations, including providing advance notice, where allowed to by law, of proposed continuous disclosure announcements; Murray Goulburn and the RE will agree that they will cooperate with each other and do all things reasonably necessary to give effect to the purpose of the Unit Trust being a special purpose investment vehicle for holding Notes and Convertible Preference Shares and passing through to Unitholders any distributions made on those Notes or Convertible Preference Shares from time to time; Murray Goulburn will provide the RE with all assistance reasonably required by the RE to ensure that the RE, as the responsible entity of the Unit Trust, is able to comply with its obligations under the ASX Listing Rules and the Corporations Act; Murray Goulburn will be responsible for, and pay directly or reimburse the RE for, all costs properly incurred by the RE in relation to its operations and the operation of the Unit Trust, including accounting, audit, legal and regulatory costs, rental costs and fees and expenses of directors, responsible managers and compliance committee members of the RE; Murray Goulburn will provide the RE with staff and with premises, computer systems and other equipment, software, know-how and other tangible and intangible property used by the staff to assist the RE to perform its obligations as the responsible entity of the Unit Trust as specified in the Trust Constitution and the Corporations Act; and Murray Goulburn will be responsible for any stamp duty payable in relation to any acquisition by the RE of an interest in Murray Goulburn as a result of holding the Notes or Convertible Preference Shares. Profit Sharing Mechanism Deed. This deed will be entered into by the RE and Murray Goulburn and will govern the operation of the Profit Sharing Mechanism as described in section 3.5. Murray Goulburn anticipates that the additional costs associated with the Unit Trust and RE, together with the costs of maintaining the STP and the Share Standard (see sections 3.2 and 3.3), will be approximately $3 million per annum The MG Unit Murray Goulburn will hold a single unit in the Unit Trust referred to as the MG Unit. The MG Unit may only be held by a member of the Murray Goulburn Group. If the holder of the MG Unit ceases to be a member of the Murray Goulburn Group, the MG Unit is immediately transferred to Murray Goulburn or such other member of the Murray Goulburn Group as Murray Goulburn directs. The MG Unit will confer on Murray Goulburn certain special rights including to require that: the Unit Trust invests only in Notes and Convertible Preference Shares (or other securities consistent with the Unit Trust continuing to be a special purpose investment vehicle that provides Unitholders with an economic exposure to Murray Goulburn); and the RE only issues Units and Non-participating Units and will not issue another MG Unit. 15

18 3 Key elements of the proposed Capital Structure continued Removal of the Responsible Entity The RE can be removed as the responsible entity of the Unit Trust by an ordinary resolution of Unitholders. If the RE is removed by Unitholders and not replaced by another responsible entity that is a wholly-owned subsidiary of Murray Goulburn, Murray Goulburn may within 12 months of the removal, at its discretion, transfer, buy-back or cancel any Convertible Preference Shares held for the RE at a 20 per cent discount to the market value of Units or in exchange for Notes and may redeem or transfer any Notes held for the RE at a 20 per cent discount to the market value of Units or in exchange for Convertible Preference Shares. The RE may deal with any Notes or Convertible Preference Shares issued on exchange in the same manner as any existing Notes or Convertible Preference Shares. If all of the Notes and Convertible Preference Shares are dealt with in this way, that would leave the Unit Trust with no continuing economic exposure to Murray Goulburn. On such a change of responsible entity, Murray Goulburn may also immediately terminate the Relationship Deed. As a result, Murray Goulburn would no longer be required to pay the costs of, or provide assistance to, the Unit Trust. Such costs would become the responsibility of the new responsible entity and may reduce the amount of distributions available to Unitholders. These dealings with the Notes and Convertible Preference Shares may result in a tax liability for the Unit Trust and its Unitholders. If Murray Goulburn causes the Unit Trust to no longer hold Notes or Convertible Preference Shares following the removal of the RE, then the STP would cease to operate in the manner explained in this booklet unless Murray Goulburn was able to replicate a similar structure. The Continuous Disclosure Deed Poll would continue to operate following a change of responsible entity, until the Unit Trust ceases to hold any Notes and Convertible Preference Shares or the Units are no longer on issue. 3.2 The Share Standard Overview of key changes to Share ownership requirements Currently Proposed Capital Structure Units of measurement Litres of milk Kilograms of milk solids (kgms) New Supplier requirement Must acquire 500 Shares at $1.00 per Share Must acquire 500 Shares at market price Participation in the Share off-take Compulsory at a rate of 0.65 cents per litre up to the 0.5 per cent maximum ownership limit Compulsory at a rate equivalent to 9 cents per kgms until Supplier reaches their Share Standard (higher rates of 13 cents or 27 cents per kgms are also available) Optional above the Share Standard up to the 0.5 per cent maximum ownership limit Price of off-take Shares $1.00 per Share Market price per Share Voting rights One vote for every 5 litres of milk supplied to Murray Goulburn per year (excess Shares converted into Non-voting Shares) One vote for every 1 kgms supplied measured on a 3-year rolling average (excess Shares converted into Non-voting Shares) Maximum ownership limit 0.5 per cent of all Murray Goulburn s share capital 0.5 per cent of all Murray Goulburn s share capital 16

19 3.2.2 Calculation of the Share Standard Each Supplier is expected to provide capital to the co-operative by acquiring Shares towards a target Share Standard. The Share Standard will be assessed on the basis of a three-year rolling average. For the purposes of the SSO, a Supplier s entitlement will be assessed on the greater of a three-year rolling average and their last year of production to 31 January 2015 (see section for details). A Supplier s Share Standard cannot exceed the maximum ownership limit of 0.5 per cent of share capital set out in Murray Goulburn s Constitution. If a Supplier or Shareholder owns or has an interest in more than one farm, the Share Standard will be assessed separately in relation to each farm. For the purposes of the SSO, multiple farms will be grouped when assessing the Supplier s SSO entitlement (see section for details). There will be no penalty for Suppliers who do not meet their Share Standard. Those Suppliers will stay on Murray Goulburn s Share off-take arrangements and continue to acquire additional Shares until they satisfy their Share Standard. Suppliers can also buy additional Shares on the STP Impact of Share Standard on disposal rights A Supplier may not sell Shares if the Supplier does not satisfy their Share Standard or the sale would result in the Supplier no longer satisfying their Share Standard. Additional sell-down restrictions apply on retirement, ceasing to supply to Murray Goulburn and where Shares acquired prior to the opening of the Supplier Priority Offer exceed a Supplier s Share Standard. See section for details Impact of Share Standard on voting rights The Share Standard will also be relevant to a Supplier s voting rights. Suppliers will be able to vote their Shares at general meetings of Murray Goulburn up to their Share Standard. Any Shares held by a Supplier above their Share Standard will be held as Non-voting Shares, which is similar to what occurs today. Currently, if a Supplier s ratio of Shares to supplied milk volumes exceeds 1:5 then the excess Shares are converted into Non-voting Shares. If the amendments to the Constitution proposed in section 8.1 are not approved it may be necessary to modify the Share Standard to retain this voting ratio. Aside from having no voting rights at a general meeting of Murray Goulburn, Non-voting Shares have the same rights as Voting Shares, including as to dividends, and can be traded on the STP at the same value as Voting Shares Share off-take Suppliers who do not hold enough Shares to satisfy their Share Standard will be required to participate in Murray Goulburn s off-take arrangements. This is similar to what occurs today and will result in a portion of the Supplier s monthly milk payments being paid in the form of Shares. The minimum rate of off-take will be equivalent to nine cents per kgms (generally equivalent to the level today, being 0.65 cents per litre), although Shares will be acquired at market price rather than $1.00 per Share. Suppliers will have the option to participate at higher rates of $0.13 or $0.27 per kgms, if they wish to acquire Shares at a faster rate. Participation in the off-take becomes optional once a Supplier reaches their Share Standard. Any additional Shares acquired above the Share Standard will be converted into Non-voting Shares New Supplier arrangements As is the case today, new Suppliers joining Murray Goulburn will be required to acquire 500 Shares. However, following the implementation of the Capital Structure, Share acquisitions will occur at the market price rather than $1.00 per Share. Murray Goulburn anticipates that the current new Supplier incentive packages (e.g. Next Generation) will continue to be available into the future to encourage production growth by new Suppliers. 17

20 3 Key elements of the proposed Capital Structure continued 3.3 Shareholder Trading Platform Introduction to the STP As part of the Capital Structure, Murray Goulburn will establish the STP, a private trading platform that Shareholders will be able to access on-line or via telephone. The STP will permit Suppliers to buy and sell Shares through the Nominated Broker subject to the Share Standard and any terms and conditions relating to the operation of the STP. The STP will only operate when the ASX is open and Units are trading. Trading on the STP will influence the number of transactions in Units on ASX and potentially the price at which Units are trading on ASX, just as any other buying and selling of Units would. The Market Facilitator (initially Macquarie Securities (Australia) Limited (ACN )) will offer to buy and sell Shares from the Nominated Broker through the STP at the same price that Units can be bought and sold on the ASX. The Market Facilitator will not trade Shares or Units on its own initiative, it will simply respond to buy and sell orders placed through the Nominated Broker by Shareholders on the STP. The Market Facilitator will not transact directly with Shareholders. It will only trade with the Nominated Broker. The Market Facilitator may also acquire Shares or Units at the direction of Murray Goulburn, including in connection with Share off-take arrangements and any Dividend Reinvestment Plan Murray Goulburn may implement, and will undertake certain rebalancing transactions as set out in section below. Any Shares acquired by the Market Facilitator will be held on its behalf by a special purpose trust established by Murray Goulburn in accordance with the Constitution. Non-voting Shares can be sold on the STP, subject to the restrictions set out in section Non-voting Shares will automatically convert into Voting Shares if acquired by a Supplier who does not satisfy their Share Standard. To trade Shares on the STP, Shareholders will need to open a trading account with the Nominated Broker (initially Bell Direct). A trading account with the Nominated Broker will not be required if a Shareholder only wishes to participate in the Share off-take Shareholders selling Shares A Supplier may not sell Shares if they do not satisfy their Share Standard or the sale would result in the Supplier no longer satisfying their Share Standard. Subject to this general rule and provided the Shares are not subject to a security interest, Shares may be sold on the STP at the prevailing market price in the following circumstances: a Supplier who holds Shares in excess of their Share Standard that were acquired prior to the opening of the Supplier Priority Offer may sell those excess Shares subject to the three-year sell down rule (explained further below); a Supplier who holds Shares in excess of their Share Standard that were acquired after the opening of the Supplier Priority Offer may sell those excess Shares at any time; a former Supplier who has retired from Murray Goulburn may sell their Shares subject to the three-year sell down rule (but will not be obliged to do so) (Retiring Suppliers); and a former Supplier who has ceased supply to Murray Goulburn in order to supply another processor must sell their Shares in accordance with the three-year sell down rule (Ceasing Suppliers). Shares affected by the three-year sell down rule may not be sold more quickly than the following schedule: first year up to 25 per cent of the affected Shares may be sold; second year up to 50 per cent of the affected Shares may be sold; third year up to 75 per cent of the affected Shares may be sold; and after the third year any remaining Shares may be sold. The shortest period within which all affected Shares may be sold is three years and one day. A Supplier or former Supplier may elect to hold their Shares or sell them over a longer period, except that a Ceasing Supplier must sell their Shares in accordance with the above schedule. If this does not occur then Murray Goulburn may sell the relevant Shares on behalf of that Ceasing Supplier at the prevailing market price. Once supply to Murray Goulburn has ceased, the entire balance of the Retiring Supplier s or the Ceasing Supplier s Shares will be immediately converted into Non-voting Shares. See section If the conversion of Preference Shares into Non-voting Shares is approved, there will be no restriction on the number of Non-voting Shares that can be sold by former B or C Class Preference Shareholders. 18

21 3.3.3 Suppliers buying Shares Following the IPO, Shares may be purchased by Suppliers on the STP at any time, subject to the limit in the Constitution that no Shareholder may hold more than 0.5 per cent of Murray Goulburn s Shares. Former Suppliers or former B or C Class Preference Shareholders will not be able to buy additional Shares on the STP. However, they will be able to buy Units on the ASX if they wish to maintain and manage an economic exposure to Murray Goulburn Dividend Reinvestment Plan It is the intention of the Board to continue to have the flexibility to offer a Dividend Reinvestment Plan (DRP) to all Shareholders as an alternative to receiving cash dividends. The DRP would generally provide for the purchase of Shares on the STP, rather than the issue of new Shares. However, the Board will retain the right to issue new Shares in order to satisfy demand for Shares under the DRP. In such circumstances, the Board will need to determine if an adjustment is required to the Profit Sharing Mechanism to take account of the issue of new Shares. Suppliers who are at the maximum ownership limit of 0.5 per cent of the Shares in Murray Goulburn will not be allowed to participate in any DRP Rebalancing transactions between Murray Goulburn, Market Facilitator and Unit Trust The Market Facilitator is a conduit between the ASX market for Units and the STP. Every time the Market Facilitator buys (or sells) a Share it will sell (or buy) a Unit to maintain a neutral exposure to Murray Goulburn. At the end of each day of trading the Market Facilitator will, if necessary, enter into one of the following rebalancing transactions which in effect involves the Market Facilitator giving up a Share to obtain a Unit and vice versa. Share rebalancing and Unit rebalancing transactions will not change the aggregate number of Units and Shares on issue, although such transactions will change the proportion of Shares to Units: Share rebalancing transaction (simplified summary only). If the Market Facilitator has bought more Shares than it has sold (i.e. it is long Shares), then the excess Shares will convert into Convertible Preference Shares, which the Market Facilitator will sell to the sub-trust of the Unit Trust and use the proceeds from that sale to convert Non-participating Units into Units. The Market Facilitator will use those Units to settle its sell orders for Units on ASX. The proceeds from the sale of the Units will be used to pay the sellers of the Shares. Unit rebalancing transaction (simplified summary only). If the Market Facilitator has sold more Shares than it has bought (i.e. it is short Shares), then the Market Facilitator will buy Convertible Preference Shares from the sub-trust of the Unit Trust which will convert into Shares which the Market Facilitator will deliver to the purchasers of the Shares. The proceeds of the sale of the Convertible Preference Shares to the Market Facilitator will be used by the RE (via the sub-trust) to convert Units held by the Market Facilitator into Non-participating Units Arrangements with Lenders to Suppliers In addition to creating a market value for Shares, the STP and related arrangements will allow lenders who have entered into a STP Side Deed with Murray Goulburn (Lenders) to register their security interests in Shares and enforce those security interests if Shareholders default under the lending arrangements with that Lender. To facilitate this, Murray Goulburn will enter into a STP Side Deed with each Lender, which will include the following key terms: Operation of the STP. Murray Goulburn must ensure that the STP operates in accordance with an agreed set of principles, including that rebalancing transactions take place in accordance with section Security interests in Shares. Murray Goulburn must ensure that the process for registering, releasing and enforcing security interests in Shares operates in an agreed manner. This includes ensuring that the Nominated Broker, the Market Facilitator and other third parties perform their required roles in relation to the registration, release and enforcement of security interests. Sale of Shares on STP. If a Lender is entitled to enforce its security over Shares, Murray Goulburn will co-operate in relation to the sale of those Shares through the STP. Restrictions on ownership and voting rights. Lenders will be prohibited from holding legal title to, or exercising voting rights in respect of, Shares and from enforcing security interests in Shares other than in accordance with agreed processes. 19

22 3 Key elements of the proposed Capital Structure continued 3.4 Changes to Murray Goulburn s share capital Introduction The proposed Capital Structure will not make significant changes to the share structure of the co-operative. Murray Goulburn will continue to be 100 per cent controlled by Suppliers and the current 0.5 per cent maximum ownership limit will remain. However, the Capital Structure will effect certain changes as explained below The Supplier Share Offer (SSO) Under the SSO, eligible Suppliers will have the opportunity to acquire additional Shares up to (or part way up to) their Share Standard. Suppliers who did not satisfy their Share Standard on 31 January 2015 will be eligible to participate in the SSO, along with any dairy farmers who join Murray Goulburn after 31 January 2015 (but at least one week before the close of the SSO) and agree to commence supplying Murray Goulburn with effect on or before 16 September For the purposes of determining a Supplier s entitlement under the SSO, the Supplier s Share Standard will be determined by reference to the greater of their average annual milk production for the three-year period ending 31 January 2015 and their last year of milk production to 31 January In addition, if a Supplier owns or has an interest in more than one farm then those farms will be grouped for the purposes of assessing the Supplier s entitlement under the SSO. Details of these matters will be set out in the SSO offer documentation. If a Supplier s entitlement under the SSO is constrained by the 1,600,000 Share ownership limit (which is a conservative estimate of the 0.5 per cent ownership limit in the Constitution), the Supplier will be entitled to a guaranteed allocation of Units under the Friends of Murray Goulburn offer (see section 3.1.4) equal to the number of Shares it was precluded from acquiring under the SSO. Any Units offered will be offered at the IPO price and not the price equivalent to the price of Shares under the SSO. Participation in the SSO will be voluntary. The price at which Shares will be offered to eligible Suppliers under the SSO will be between $1.00 and $1.24 per Share depending on how long the Supplier has supplied Murray Goulburn. The SSO pricing is intended to be fair to all Suppliers and recognise that long-term Suppliers have had to participate in the Share off-take since joining Murray Goulburn. The costs associated with acquiring Shares under the Share off-take offset by the benefit of any dividends and bonus Share issues have been taken into account in determining the pricing set out below. The sliding scale pricing ensures that more recent Suppliers acquiring Shares at $1.24 per Share will be in an approximately equivalent financial position to long-term Suppliers who have had to participate in the Share off-take for 10 years at $1.00 per Share. Longer-term Suppliers may also have the benefit of owning Shares in excess of their Share Standard. More recent Suppliers will only be able to purchase Shares under the SSO up to their Share Standard. Purchase price of additional Shares under the SSO 1.30 SSO purchase price ($/share) $1.24 $1.21 $1.19 $1.17 $1.14 $1.12 $1.09 $1.07 $1.05 $1.02 $ <1 yr 1 to 2 yrs 2 to 3 yrs 3 to 4 yrs 4 to 5 yrs 5 to 6 yrs 6 to 7 yrs Years of supply as at 27 April to 8 yrs 8 to 9 yrs 9 to 10 yrs 10+ yrs 20

23 3.4.2 The Supplier Share Offer (SSO) continued Suppliers who participate in the SSO must commit to a one, two or three-year exclusive milk supply agreement with Murray Goulburn that will include a commitment to continue to supply, during each year of the contract, at least 75 per cent of the quantity of milk solids used to calculate the Supplier s entitlement under the SSO. The duration of the supply agreement will depend on the number of Shares acquired by a Supplier under the SSO as a proportion of their Share Standard, as set out below: less than 33 per cent of the Share Standard a one-year milk supply agreement will apply; between 33 and 66 per cent (inclusive) of the Share Standard a two-year milk supply agreement will apply; and more than 66 per cent of the Share Standard a three-year milk supply agreement will apply. Suppliers who participate in the SSO and then retire prior to the expiration of their milk supply agreement may be required to partially compensate Murray Goulburn for not fulfilling their milk supply commitments by paying Murray Goulburn an amount equal to: the Supplier s Share Standard as at the SSO opening date x $0.40 x (unexpired portion of committed term (in days) committed term (in days)). For example, if a Supplier with a Share Standard of 150,000 kgms at the SSO opening date retires after 90 days of a one-year committed term, the payment would be 150,000 x $0.40 x ((365-90) 365) or $45, If the Supplier supplies milk to Murray Goulburn through a company or partnership in which it has an interest, then these obligations may apply to that company or partnership in addition, or instead of, to the Supplier The Supplier Priority Offer All Suppliers as at the date which is one week prior to the close of the Supplier Priority Offer period will be eligible to participate in the Supplier Priority Offer regardless of whether they qualified for, or participated in, the SSO. Under the Supplier Priority Offer eligible Suppliers will be entitled to purchase Shares at the IPO price up to a maximum ownership limit of 1,600,000 Shares. This limit is a conservative estimate of the likely amount of the 0.5 per cent ownership limit contained in the Constitution. The Supplier Priority Offer is an important element of the Capital Structure as it provides all Suppliers with an opportunity to increase their stake in Murray Goulburn and may reduce the amount of capital that Murray Goulburn would need to raise from external investors under the IPO Non-voting Shares The Constitution currently provides for Non-voting Shares to be held by Shareholders in certain circumstances. If the Capital Structure is implemented, Non-voting Shares will be held by three categories of Shareholders: Suppliers above their Share Standard. To the extent the number of Voting Shares held by a Supplier exceeds their Share Standard those Voting Shares will be converted into Non-Voting Shares. This will prevent a Supplier obtaining voting rights out of proportion to the quantity of milk solids they supply to Murray Goulburn. See section for details. This is consistent with current arrangements. Former Suppliers. Any Voting Shares held by Suppliers who retire or cease to supply Murray Goulburn after the Capital Structure is implemented will be converted into Non-Voting Shares. This will ensure that Murray Goulburn remains 100 per cent controlled by active Suppliers. Former B and C Class Preference Shareholders. If approved, any remaining B and C Class Preference Shares will be converted into Non-voting Shares. See section for details. It is possible that Non-voting Shares could, by operation of law, be transferred to third parties (e.g., as a result of death or incapacity). However, the Non-voting Shares could not be sold other than on the STP, which is only open to Shareholders. Each Non-voting Share confers on its holder the same rights and restrictions as a Voting Share, except that a holder has no right to vote the Non-voting Share at any general meeting of Murray Goulburn. Non-voting Shares can be sold on the STP at the same value as Voting Shares. See section for details. 21

24 3 Key elements of the proposed Capital Structure continued Tasmanian Dairy Products suppliers Murray Goulburn and Mitsubishi Corporation currently operate a joint venture known as Tasmanian Dairy Products (TDP). TDP is supplied milk directly by its own suppliers. Murray Goulburn and Mitsubishi Corporation have proposed that from 1 July 2015 Murray Goulburn will supply milk to TDP. Murray Goulburn therefore proposes that current TDP suppliers join Murray Goulburn and enter into new milk supply agreements with Murray Goulburn with effect from 1 July As a result, all current and prospective TDP suppliers will be invited to join Murray Goulburn on the same terms currently available to all new Suppliers, that is subscribing for 500 Shares at the price of $1.00 per Share. Murray Goulburn also intends to give TDP suppliers the opportunity to participate in the SSO and acquire Shares up to the greater of their average annual milk production for the three-year period ending 31 January 2015 or their actual milk production for the year ending 31 January 2015 (which amount cannot exceed a total ownership limit of 1,600,000 Shares). Tenure with TDP will be recognised for the purposes of calculating the relevant SSO price applicable to those TDP suppliers. Further details of the offer will be provided to TDP suppliers. While TDP suppliers who join Murray Goulburn will be able to participate in the SSO and Supplier Priority Offer, they will not be able to vote at the EGM on 8 May 2015 or receive any dividends that the Board may declare relating to the 2015 financial year B or C Class Preference Shareholders resuming supply In January 2015, Murray Goulburn undertook a voluntary selective buy-back of B and C Class Preference Shares at $1.25 per Preference Share. This provided Preference Shareholders with an opportunity to receive cash in return for the cancellation of their Preference Shares. As at 7 April 2015, 7.6 million B Class Preference Shares and 17.3 million C Class Preference Shares remain on issue. Any B and C Class Preference Shareholders who are actively supplying milk to other processors may resume supplying Murray Goulburn. If this occurs at least one week prior to the close of the SSO, the following process will apply: any B or C Class Preference Shares held by the returning Supplier will be converted into Voting Shares on a one-for-one basis; a Share Standard will be calculated for that Supplier, being the greater of the average supply for the last three years or the last full year of supply; a returning Supplier that does not satisfy the Share Standard will be eligible to acquire additional Shares under the SSO at $1.24, provided they commit to a one, two or three-year supply agreement in the same way as Suppliers (see section 3.4.2); and a returning Supplier that satisfies the Share Standard must commit to a three-year supply agreement. If this occurs at least one week prior to the IPO price being determined, the following process will apply: any B or C Class Preference Shares held by the returning Supplier will be converted into Voting Shares on a one-for-one basis; a Share Standard will be calculated for that returning Supplier, being the greater of the average supply for the last three years or the last full year of supply; a returning Supplier that satisfies the Share Standard must commit to a three-year supply agreement; and a returning Supplier that does not satisfy the Share Standard must commit to a one, two or three-year supply agreement based on the number of Shares they hold as a percentage of their Share Standard as set out below: less than 33 per cent of the Share Standard a one-year milk supply agreement will apply; between 33 and 66 per cent (inclusive) of the Share Standard a two-year milk supply agreement will apply; and more than 66 per cent of the Share Standard a three-year milk supply agreement will apply. 22

25 3.4.7 Consolidation and Conversion of remaining B and C Class Preference Shares Murray Goulburn proposes to extend some of the benefits of the Capital Structure to any remaining B or C Class Preference Shareholders, many of whom have a close association with Murray Goulburn and have only recently retired. If the Capital Structure is implemented, and subject to the approval by B and C Class Preference Shareholders, Murray Goulburn proposes to consolidate and convert all remaining Preference Shares into Non-voting Shares according to the following ratio: $1.25 IPO price Number of Preference Shares = Number of Non-voting Shares For example, if the IPO price is $2.50* per Unit then a B or C Class Preference Shareholder with 100,000 shares would receive 50,000 Non-voting Shares: ($1.25/$2.50) x 100,000 = 50,000 * Example only. Not indicative of future IPO price. IPO price may differ materially from this example. The value of $1.25 attributed to each Preference Share is the same as the buy-back price offered to B and C Class Preference Shareholders under the selective buy-back approved on 27 November 2014 and the value A Class Preference Shareholders received under the selective capital reduction approved on 6 June In setting this price, the Board has considered the rights of the B and C Class Preference Shares. The consolidation and conversion of B Class Preference Shares into Non-voting Shares requires approval at the EGM and the class meeting of B Class Preference Shareholders. If the consolidation and conversion is not approved at the EGM and by the B Class Preference Shareholders, or the proposed Capital Structure is not implemented, then B Class Preference Shareholders will retain their existing Preference Shares. Similarly, the consolidation and conversion of C Class Preference Shares into Non-voting Shares requires approval at the EGM and the class meeting of C Class Preference Shareholders. If the consolidation and conversion is not approved at the EGM and by the C Class Preference Shareholders, or the proposed Capital Structure is not implemented, then C Class Preference Shareholders will retain their existing Preference Shares. If the Capital Structure is implemented, but the B and/or C Class Preference Shares remain on issue, then B and/or C Class Preference Shares will only be able to be sold through a Murray Goulburn-facilitated process for $1.00 per Share (assuming this process is retained, which is not guaranteed). In addition, it is likely that dividend payments on B and/or C Class Preference Shares will decline in the future, particularly if the Capital Structure is not implemented. If approved by Shareholders and B and/or C Class Preference Shareholders, the consolidation and conversion will take effect on the Implementation Date. The Independent Expert has concluded that the conversion of B and C Class Preference Share into Non-voting Shares is fair and reasonable to Preference Shareholders. The Independent Expert s Report is contained in Attachment Convertible Preference Shares and Notes Convertible Preference Shares and Notes (issued by Murray Goulburn) will be held in the Unit Trust as a consequence of the IPO and the operation of the STP and rebalancing transactions (see sections and for details). Convertible Preference Shares and Notes will have equivalent dividend rights to Shares. Both Convertible Preference Shares and Notes may be respectively redeemed, bought back, cancelled or transferred by Murray Goulburn in limited circumstances such as following an event of default or the removal of the RE as responsible entity of the Unit Trust (unless replaced with another wholly-owned Murray Goulburn subsidiary). If there is a change of control event in relation to Murray Goulburn, such as a takeover, which given the 0.5 per cent maximum ownership limit would involve an amendment to the Constitution requiring 90 per cent shareholder approval, then Convertible Preference Shares and Notes would, as far as possible, receive the same consideration and benefits as a Share as a result of the change of control. Notes and Convertible Preference Shares will be treated equivalently to Shares where Murray Goulburn undertakes securities transactions such as rights issues, equal capital reductions and equal access buy-backs. Notes are subordinated to the claims of creditors and rank equally with Shareholders claims. Convertible Preference Shares also rank equally with Shares, except that upon the winding up of Murray Goulburn they will be entitled to a one cent preference before the distribution of any surplus to all shareholders. 23

26 3 Key elements of the proposed Capital Structure continued 3.5 Farmgate Milk Price and the Profit Sharing Mechanism Introduction and background Under the proposed Capital Structure, Murray Goulburn will introduce a Profit Sharing Mechanism to govern the allocation of the Milk Pool between milk payments, income tax and dividends on Shares and distributions on Units. The Profit Sharing Mechanism is designed to: create clear alignment of interests between Suppliers and Unitholders, with each set of stakeholders benefiting from increases in the FMP; provide transparency in relation to the approach of Murray Goulburn in setting the FMP and the level of dividends on Shares (and therefore distributions on Units); and put in place an effective governance framework to ensure the appropriate implementation and application of the mechanism, including in relation to any deviations from it and any potential future adjustments to the mechanism or retention of capital from the Milk Pool. This description of the Profit Sharing Mechanism assumes that the B and C Class Preference Shares will be converted into Non-voting Shares in the manner described in section If this does not occur then the amount allocated to pay dividends on Shares and distributions on Units will need to also pay dividends on B and/or C Class Preference Shares Murray Goulburn s historical calculation of the FMP Under its co-operative principles, Murray Goulburn has sought to maximise the FMP payable to Suppliers each season rather than being primarily focused on maximising profits and dividend payments. In practical terms, the Board has targeted a particular level of annual net profit after tax (NPAT) post-milk payments (for example, between $20 $30 million) to pay dividends on Shares and Preference Shares and in some years when the FMP could support it, retains profits. The Board has determined the FMP so that Murray Goulburn s revenue less its total expenses (including milk payments) meets that NPAT target. In other words, the FMP in each year has been based on the difference between profit before milk payments and the relevant NPAT target, applied across the Southern Milk Region milk solids intake. Murray Goulburn s historical approach to calculating the FMP payable to suppliers Revenue Expenses (incl. tax) NPAT target (e.g. $25 m) = Southern Milk Region milk payments Southern Milk Region milk solids intake = Southern Milk Region FMP Overview of the Profit Sharing Mechanism Under the proposed Capital Structure, the Profit Sharing Mechanism will be put in place to govern the setting of the FMP and the amount of NPAT available to be paid as dividends on Shares and distributions on Units. The allocation between FMP and NPAT will be based on the FMP and the size of the Milk Pool. The Milk Pool is defined as net profit before income tax, and milk payments. The Milk Pool will be allocated across milk payments, income tax and NPAT, with NPAT being allocated across dividends on Shares and distributions on Units. Milk payments will initially only include payments to suppliers in the Southern Milk Region, with any payments to Suppliers in other markets being paid separately (i.e., as expenses before the calculation of the Milk Pool). 24

27 3.5.3 Overview of the Profit Sharing Mechanism continued Proposed approach under the Profit Sharing Mechanism Suppliers and investors aligned in seeking to maximise Southern Milk Region milk payments Revenue Total expenses (other than Southern Milk Region milk payments and income tax) = Milk Pool Milk Pool allocated via Profit Sharing Mechanism Income Tax Shareholders NPAT Dividends/ distributions Unitholders The size of the Milk Pool will change from year to year due to a number of factors including market conditions and the performance of Murray Goulburn s business. As a result, the annual allocations to milk payments, dividends and distributions are not fixed and are likely to fluctuate from year to year, as is the case today. The Profit Sharing Mechanism will determine the percentage of the Milk Pool to be allocated to NPAT each year for particular FMP ranges, with the remainder being allocated to milk payments and income tax. The following is an illustrative example of the allocation of the Milk Pool under the Profit Sharing Mechanism. Allocation of Milk Pool under Profit Sharing Mechanism (indicative only) Actual average weighted FMP (Southern Milk Region) Percentage of Milk Pool allocated to NPAT Percentage of Milk Pool allocated to milk payments and income tax FMP<$ % 96.5% $5.00 FMP<$ % 4.5% 95.5% 96.5% $5.50 FMP<$ % 5.5% 94.5% 95.5% $6.00 FMP<$ % 6.5% 93.5% 94.5% $6.50 FMP<$ % 7.5% 92.5% 93.5% FMP $ % 92.5% 25

28 3 Key elements of the proposed Capital Structure continued Overview of the Profit Sharing Mechanism continued The prospectus for the SSO and Supplier Priority Offer and the product disclosure statement for the IPO will contain pro forma historical financial information and forecast financial information taking account of the proposed Profit Sharing Mechanism. Any attempt to calculate the likely IPO offer price or the pro forma FMP that would be paid in any given year under the Profit Sharing Mechanism without the financial information that will be included in the disclosure documents is unlikely to be accurate Alignment of Shareholders and Unitholders interests The Profit Sharing Mechanism has been structured to align Shareholders and Unitholders economic interests. In general terms, it can be summarised as follows: when the FMP is relatively high, Murray Goulburn will allocate a higher proportion of the Milk Pool to NPAT available for dividends to Shareholders and distributions to Unitholders; and when the FMP is relatively low, Murray Goulburn will allocate a lower proportion of the Milk Pool to NPAT available for dividends to Shareholders and distributions to Unitholders. In this way, dividends to Shareholders and distributions to Unitholders will be positively correlated to movements in the FMP, providing alignment of interests between Shareholders and Unitholders. The chart below demonstrates that as the FMP paid to Suppliers increases, dividends/distributions paid to Shareholders and Unitholders also increase. Indicative FMP and dividend outcomes under the Profit Sharing Mechanism at various FMP prices per kgms $10.00 $8.00 NPAT/dividends. Dividend increases in line with milk payments Milk payments. Vast majority of milk pool paid to suppliers through milk payments FMP/kgms $6.00 $4.00 $2.00 $0.00 $4.75 $5.25 $5.75 $6.25 $6.75 $7.25 $

29 3.5.5 Administration of the Profit Sharing Mechanism At the beginning of each financial year, Murray Goulburn will forecast the opening FMP for that financial year, with guidance for the full year also provided based on budgeted outcomes where possible. Murray Goulburn will disclose an update to its full year forecast and FMP forecast with its half year results and otherwise in accordance with its continuous disclosure obligations. The final outcomes for FMP and NPAT under the Profit Sharing Mechanism for each financial year will be based on the final, full year audited financial results of Murray Goulburn. The administration of the Profit Sharing Mechanism will be overseen by the Board, which will ultimately determine the final allocation of the Milk Pool to milk payments, income tax and NPAT each financial year in accordance with the Profit Sharing Mechanism. The Board maintains discretion to set the level of allocation of the Milk Pool to NPAT within the allocation bands that apply in any given financial year. For example if the FMP falls between $6.00 and $6.49 the Board will have discretion to set the allocation of monies to NPAT within the 5.5 per cent 6.5 per cent allocation band. If the FMP falls below $5.00, the allocation to NPAT will be fixed at 3.5 per cent (or as adjusted per section 3.5.8). Similarly, if the FMP rises above $7.00, the allocation to NPAT will be fixed at 7.5 per cent (or as adjusted per section 3.5.8). The Board proposes that 100 per cent of the determined NPAT will be distributed as dividends on Shares and distributions on Units Retention of capital from the Milk Pool by Murray Goulburn Given the proposed 100 per cent payout ratio from the determined NPAT, Murray Goulburn will retain the flexibility to retain capital for general corporate purposes from the Milk Pool. Accordingly, Murray Goulburn may retain capital from the Milk Pool, up to a maximum retention amount of three per cent in any financial year. The Profit Sharing Mechanism will then be applied to the adjusted Milk Pool after deducting the retained amount. Any retention of capital will be limited to circumstances where Murray Goulburn has identified capital projects or investments for which the retained capital will be used, or in circumstances where the Milk Pool is sufficiently large that the Board considers that the retention of capital would not materially and adversely impact Murray Goulburn s competitiveness in the sourcing of milk. Retaining capital from the Milk Pool will, in effect, allocate the retention on a pro rata basis to Suppliers and Unitholders in accordance with the Profit Sharing Mechanism allocation ranges. Murray Goulburn does not intend to retain capital from the Milk Pool in the next three years Adjustments to the Profit Sharing Mechanism The Profit Sharing Mechanism is intended to provide clarity to both Suppliers and Unitholders on Murray Goulburn s approach to allocating the Milk Pool. As such, it is intended that the mechanism will only be able to be altered in limited circumstances: Inflation: The Profit Sharing Mechanism will be adjusted annually to account for 50 per cent of observed inflation in Melbourne. Capital raisings/reductions: The Profit Sharing Mechanism may also be adjusted to account for any changes in Murray Goulburn s capital pool (such as capital raisings, capital reductions or similar events). The adjustments will be determined by the Board and will require unanimous approval of Murray Goulburn s Special Directors. 27

30 3 Key elements of the proposed Capital Structure continued One-off deviations from the Profit Sharing Mechanism It is the intention of the Board not to depart from the Profit Sharing Mechanism in allocating the Milk Pool to milk payments and NPAT each year. However, in certain abnormal circumstances, the Board may decide that, for the benefit of all stakeholders (including Suppliers and Unitholders), the Profit Sharing Mechanism should be deviated from when allocating the Milk Pool to milk payments and NPAT. Examples of abnormal circumstances that may give rise to a departure from the Profit Sharing Mechanism could include extreme prolonged drought conditions or prolonged levels of heightened competition for milk supply. In these instances, the Board may decide to increase the percentage of the Milk Pool allocated to milk payments, above that which would otherwise apply under the Profit Sharing Mechanism, in order to protect its milk supply and support its Supplier base. Any departures from the Profit Sharing Mechanism will require the unanimous approval of Murray Goulburn s Special Directors on the basis that the change is in the interests of both Shareholders and Unitholders overall. The Special Directors will obtain an independent expert s report to confirm that such a decision is in the interests of Shareholders and Unitholders overall. 3.6 Changes to Constitution Changes to Constitution relating to Capital Structure Murray Goulburn proposes to make a number of changes to its Constitution relating to the Capital Structure. Although none of these changes are essential to the Capital Structure, the proposed changes will allow the Capital Structure to be implemented and administered in an efficient manner. If any of the changes are not approved the Board may elect to change elements of the Capital Structure, or to not proceed with the Capital Structure, at its discretion. The proposed changes are set out in detail in section 8. They can be summarised as follows: Implementation of the Share Standard: Changes relating to the implementation of the Share Standard. Replacement of Preference Share provisions: Changes relating to the removal of provisions relating to B and C Class Preference Shares (which will only be removed if the consolidation and conversion of those Preference Shares is approved), together with the insertion of a new power to issue preference shares, which will be used to issue Convertible Preference Shares. Changes to conversion mechanics: Changes relating to the circumstances and manner in which the Board can convert Voting Shares into Non-voting Shares (or vice versa), or either of them into Preference Shares (or vice versa). The three categories of proposed changes will be voted on separately. If the Capital Structure is approved but the first category of changes is not approved then it may be necessary to modify the Share Standard to retain the existing voting ratio of one Voting Share per five litres of annual milk supply currently contained in the Constitution. If the Capital Structure is approved but the second and/or third category of changes is not approved then it may be necessary to modify arrangements with the RE and the Market Facilitator, including in relation to the securities they hold and the conversion mechanisms that apply in relation to those securities. If the Capital Structure is approved but the third category of changes is not approved it may be necessary to continue to convert Shares held by retiring or ceasing Suppliers into Preference Shares rather than Non-voting Shares Changes requiring approval of B and C Class Preference Shareholders The changes to the Constitution to replace provisions relating to the B and C Class Preference Shares and to amend provisions relating to the conversion of Preference Shares could potentially affect the rights attaching to B and C Class Preference Shares and need to be approved by a special resolution of each class of Preference Shareholders at class meetings to be held after the EGM on 8 May

31 4 Advantages and Disadvantages of the Capital Structure 4.1 Effect of Capital Structure on composition of Supplier returns Impact of franking credits Murray Goulburn is likely to become a tax paying entity in the near term (see section 5 for details). As a result, dividends paid to Shareholders in the future are likely to include franking credits. The Board plans to pay fully franked dividends to the extent possible. This will result in a change to the composition of returns received by Suppliers, with some of the return being paid in the form of franking credits. While Murray Goulburn anticipates that Shareholders should benefit from these franking credits, Suppliers should obtain their own financial and tax advice in relation to this issue Change in proportion of dividend/distribution payments to milk payments As a result of the proposed Capital Structure, the composition of the return paid to Suppliers is also expected to change due to aggregate dividend and distribution payments to Shareholders and Unitholders increasing relative to aggregate milk payments. This is expected to occur as a result of Supplier participation in the SSO and Supplier Priority Offer, which will increase the number of Shares on issue, and the need to pay Unitholders a return on their investment Change in composition of Supplier returns over time As represented below, milk payments will continue to comprise the vast majority of Supplier returns. However, dividends, franking credits and anticipated returns from proposed capital expenditure projects will play a role going forward. Illustrative representation of change in composition of Supplier returns Total supplier payout (1 kgms + 1 share) Current Proposed Proposed + return from capex Franking credits per share Dividend per share Capex return Available FMP per kgms As a result of the change of tax status and increased dividend and distribution payments, it is anticipated that the available FMP could initially reduce slightly. However, Supplier returns will incorporate an element of dividend and franking credits. Over time, it is expected that Suppliers, in particular those at or above their Share Standard, will benefit from returns from capital expenditure projects to be funded by the IPO in the form of higher FMP and increased dividends. Even Suppliers who are not at their Share Standard, are likely to have better returns as a result of the capital expenditure projects than they would have if the capital expenditure was not undertaken. The Board considers these investments to be critical to achieving Murray Goulburn s goal of delivering sustainably higher returns for its Suppliers. 29

32 4 Advantages and Disadvantages of the Capital Structure continued 4.2 Advantages of the Capital Structure The principal reasons for, and advantages of, the proposed Capital Structure are set out below Retains 100 per cent Supplier control Under the proposed Capital Structure, Murray Goulburn will be able to raise non-voting equity from investors through the Unit Trust. This will maintain 100 per cent Supplier control of Murray Goulburn. The Constitution of Murray Goulburn does not permit Murray Goulburn itself to be listed on the ASX. This is why a separate legal structure with no voting rights in Murray Goulburn is being listed Potential for increased Supplier returns The proposed Capital Structure will also enable Murray Goulburn to invest in a number of key capital projects and other opportunities that are targeted to deliver a higher FMP to Suppliers and higher dividends to Shareholders. The Capital Structure will also give Suppliers the potential for capital growth in the value of their Shares. Although the IPO price is not known at this time, the Board is unlikely to implement the Capital Structure unless the IPO price represents a premium to the maximum price at which Shares are offered to Suppliers under the SSO (being $1.24 per Share) Provides access to capital and funding for Murray Goulburn s growth strategy The Capital Structure will enable Murray Goulburn to raise new capital from Suppliers and external investors and will provide funding for Murray Goulburn s growth strategy of Operating Excellence and Innovation in order to deliver a sustainably higher FMP over time Attractive investment opportunity for external investors Currently there are few opportunities for investors to gain exposure to the Australian dairy industry. The IPO of the Unit Trust will provide investors with direct exposure to the dairy and agricultural sectors. Investing in Murray Goulburn also provides investors with an exposure to the global demand for dairy Reduces Murray Goulburn s reliance on debt funding The Capital Structure will reduce the reliance of Murray Goulburn on debt funding and provide Murray Goulburn s balance sheet with the strength and flexibility to pursue capital expenditure and market investment opportunities when they arise Provides a market value for Shares The Capital Structure will provide Suppliers with an observable market value for their Shares. Suppliers may be able to borrow against their Shares from a number of leading lenders. This is expected to give Suppliers greater flexibility to invest at the farm level and promote investment in the Australian dairy sector generally Attracts new Suppliers to Murray Goulburn Murray Goulburn believes that the proposed Capital Structure will be attractive to new Suppliers to Murray Goulburn both in the short term, through participation in the SSO and Supplier Priority Offer, and over the longer term, through sustainably higher FMP. 30

33 4.3 Disadvantages of the Capital Structure The principal disadvantages of undertaking the proposed Capital Structure are set out below. These disadvantages are in addition to any general business or operational risks affecting Murray Goulburn Short-term reduction in FMP The Capital Structure will result in an increase in the number of Shares and Units on issue. This is likely to result in an increase in dividend and distribution payments under the Profit Sharing Mechanism which is likely to slightly reduce the FMP initially. See also section Complexity of Capital Structure The Capital Structure has been designed to meet the needs of Murray Goulburn and its Suppliers, while simultaneously giving external investors exposure to the financial performance of Murray Goulburn. While the Capital Structure has been carefully designed, it is unique and remains untested. The Capital Structure is not in the form of a typical IPO and there may be some uncertainty from external investors and Suppliers regarding how it will perform. The lack of understanding or confidence in the Capital Structure may reduce the pool of possible investors in the Unit Trust, the price of Units and the liquidity of Units Volatility of Share value One of the fundamental principles of the Capital Structure is to provide Suppliers with a market value for their Shares, based on the market value of Units on the ASX. The value of Shares will vary over time due to a number of factors including fluctuations in the domestic and international market for listed stocks, general economic conditions (including interest rates, inflation rates, exchange rates, commodity and oil prices or changes to government fiscal, monetary or regulatory policies, legislation or regulation), investor sentiment, man-made or natural events, the inclusion in or removal of the Units from market indices, expectations regarding the future distributions on Units and general market, business and operational risks affecting Murray Goulburn. Suppliers who borrow against their Shares will need to carefully assess the risk Lack of liquidity There can be no guarantee that an active market in the Units on the ASX will develop or be maintained indefinitely. Lack of liquidity of Units may result in Suppliers being unable to trade Shares. For example, if a Unitholder was to acquire substantially all of the Units in the Unit Trust, it would be likely to impact liquidity in the Unit market, which would affect Suppliers ability to trade Shares on the STP. As is the case in relation to any ASX-listed entity, an investor owning 5 per cent or more of the Unit Trust must disclose their holding to the ASX and any foreign investor seeking to own more than 14.9 per cent would need to comply with the requirements of the Foreign Acquisitions and Takeovers Act. To acquire 20 per cent or more, an investor would need to make a takeover offer for the Unit Trust (or rely on exemption to the takeover laws) Failure to implement and maintain operational effectiveness of the STP As part of the Capital Structure, the STP has been designed to allow Suppliers to trade Shares through the Nominated Broker and Market Facilitator. The STP will need to interact with systems from Murray Goulburn, the Market Facilitator, the Nominated Broker and other third parties. A failure to implement and maintain operational effectiveness of the STP may lead to Shareholders not being able to efficiently trade Shares and may cause reputational and financial loss for Murray Goulburn and affect Unitholder returns. In addition, a failure of the STP may cause loss to Lenders who have provided loans and have taken security over Shares. Murray Goulburn may be required to indemnify those Lenders for that loss in certain circumstances. 31

34 4 Advantages and Disadvantages of the Capital Structure continued Uncompetitive FMP A fundamental principle of the Capital Structure is to pursue growth opportunities to improve operating efficiency, reduce manufacturing costs, promote innovation and deliver sustainable growth in the FMP. Given the unique structure, there is a risk that the Profit Sharing Mechanism is not appropriately calibrated and gives rise to an uncompetitive FMP, leading to the loss of Suppliers Loss of Suppliers The Capital Structure aims to provide Suppliers with a Share value that represents an enhancement on the current Share value of $1.00 per Share. The proposed IPO may provide an opportunity for Suppliers to realise the market value of their Shares and cease supply to Murray Goulburn in order to retire or move to another processor Failure to successfully implement business strategy Murray Goulburn s strategy to grow its business and deliver sustainably higher FMP through investment in higher-value-add products, improving operational efficiencies and capacity and innovation may not be achieved due to a number of factors including an inability of Murray Goulburn to successfully execute its strategy, failure to access sufficient capital (debt or equity), failure to achieve necessary profits to improve the FMP, the actions of competitors or overall economic or market conditions Regulatory approvals and third party consents Murray Goulburn is seeking a tax ruling from the ATO in relation to the Capital Structure. If the ATO does not grant the requested ruling it may not be possible to implement the Capital Structure in the manner proposed. Murray Goulburn has also applied for technical relief from ASX in a number of areas. Although ASX has indicated its preliminary support in relation to these applications, final approval has not yet been obtained. It is possible final approval will be subject to conditions that require changes to the Capital Structure. Under the terms of its lending arrangements, Murray Goulburn is required to obtain the consent of its lenders in relation to the issue of the Notes and Convertible Preference Shares. As of the date of this notice, Murray Goulburn has not obtained all required lender consents Dilution of economic interest in the co-operative The issue of Units, which carry identical economic rights to Shares, will dilute Shareholders economic interest in Murray Goulburn (although not their voting interest). If the Unit Trust issues additional Units, either as part of a future capital raising or in connection with the rebalancing mechanism described in section 3.3.5, Shareholders economic interest in Murray Goulburn will be diluted further Stamp duty risk Stamp duty is levied by all States and Territories on acquisitions of significant interests in land holding companies. There is a risk that the Unit Trust could be subject to stamp duty if the aggregate number of Notes and Convertible Preference Shares held by the RE is greater than the number of Shares on issue. Murray Goulburn has indemnified the Unit Trust in relation to this potential stamp duty liability. 32

35 5 Tax implications 5.1. Warning This summary does not constitute financial product advice as defined in the Corporations Act This summary is confined to taxation issues and is only one of the matters you need to consider when making a decision about your investments. You should consider taking advice from a licensed adviser, before making a decision about your investments. It is important that Shareholders understand that the comments below are general in nature and do not take into account their individual circumstances or constitute tax advice. It is recommended that Shareholders seek their own advice. The categories of Shareholders considered in this summary are limited to individuals, companies, trusts, partnerships and complying superannuation funds that hold their shares on capital account. This summary does not consider the consequences for foreign resident Shareholders, Shareholders that hold their Shares on revenue account or carry on a business of trading in shares, or Shareholders who are exempt from Australian tax. This summary also does not cover the consequences for Shareholders who are subject to the Taxation of Financial Arrangements rules contained in Division 230 of the Income Tax Assessment Act The summary is based on the relevant Australian tax laws in force, established interpretations of those laws and the understanding of the practice of the relevant Tax Authorities at this time. The summary does not take into account the tax law of countries other than Australia. Tax laws are complex and subject to ongoing change. The tax consequences discussed in these summaries does not take into account or anticipate any changes in law (by legislation or judicial decision) or any changes in the administrative practice or interpretation by the relevant Tax Authorities. If there is a change, including a change having retrospective effect, the tax implications should be reconsidered by Shareholders in light of the changes. 5.2 Existing Shares and Preference Shares The steps that are proposed to be taken in relation to the Capital Structure including the IPO, the changes to the Constitution and the creation of the STP do not involve any disposal or CGT event in relation to existing Shares and therefore should not involve any immediate income tax consequences for Shareholders. The conversion of Preference Shares to Non-voting Shares will involve a CGT event due to the variation of share rights but is not expected to have any immediate income tax consequences for Preference Shareholders as no consideration is received by Preference Shareholders in respect of the variation. If Shareholders sell their existing Shares after the Capital Structure is implemented, the disposal is likely to give rise to a CGT event. Shareholders should have a cost base in relation to their Shares equal to the amount originally paid for them which is generally $1.00 per Share and will make a capital gain to the extent that the capital proceeds of sale exceed that amount. Individuals and complying superannuation funds should be entitled to the CGT discount in relation to the sale of their Shares provided that they have held them for at least 12 months. Where the CGT discount applies, any capital gain arising to individuals may be reduced by one-half after offsetting current year or prior year capital losses. For a complying superannuation entity, any capital gain may be reduced by one-third after offsetting current year or prior year capital losses. Where the Shareholder is a trustee of a trust that has held the units for at least 12 months before disposal, the benefit of the CGT discount may flow through to beneficiaries who are individuals or complying superannuation entities at the discount rate applicable to them and after offsetting current year or prior year capital losses available to them. Shareholders that are trustees should seek specific advice regarding the tax consequences of distributions to beneficiaries who may qualify for discounted capital gains. A capital loss should be realised where the reduced cost base of the share exceeds the capital proceeds from disposal. Capital losses may only be offset against capital gains realised by the Shareholder in the same income year or future income years, subject to certain loss recoupment tests being satisfied. Capital losses cannot be offset against other forms of assessable income. 33

36 5 Tax implications continued 5.3 Supplier Shareholder Offer Under the SSO, eligible Suppliers are offered the opportunity to acquire Shares to assist them in meeting the Share Standard. A class ruling has been sought from the Australian Taxation Office (ATO) in relation to the income tax consequences of the SSO. The class ruling is expected to confirm that any discount to the IPO price will not be assessable to Suppliers who take up the SSO. If Suppliers sell the Shares they acquire under the SSO, their cost base will be limited to what they pay under the SSO. Please refer to section 5.2 for tax consequences arising on disposal. 5.4 Supplier Priority Offer Under the Supplier Priority Offer, Suppliers are offered the opportunity to acquire Shares above their Share Standard at the IPO price for Units. This price may be different to the price at which Shares commence trading on the STP. Any difference between the IPO price and the price at which Shares commence trading on the STP should not give rise to any assessable or deductible amount to Suppliers. A Supplier s cost base in Shares acquired under the Supplier Priority Offer should be the amount they pay under the Supplier Priority Offer. Please refer to section 5.2 for tax consequences arising on disposal. 5.5 Tax treatment of dividends It is anticipated that, from 1 July 2015, dividends paid to Shareholders will be franked. Those dividends should constitute assessable income for an Australian tax resident Shareholder. Australian tax resident Shareholders who are individuals or complying superannuation entities should include the dividend in their assessable income in the year the dividend is paid, together with any franking credits attached to that dividend. Shareholders should be entitled to a tax offset equal to the franking credits attached to their dividends subject to satisfying the various rules relating to franking credits (refer further comments below). The tax offset can be applied to reduce the tax payable on the Shareholder s taxable income. Individuals and complying superannuation funds should be entitled to a tax refund where the tax offset exceeds the tax payable on their taxable income. Companies are not entitled to a tax refund if the tax offset exceeds the tax payable on their taxable income. However, their excess franking credits may be converted into carry-forward tax losses in some circumstances. Companies that receive franked dividends should be entitled to a credit in their own franking account to the extent of the franking credits attached to the dividends. These franking credits can then be passed on to their own shareholder(s) on the payment of franked distributions. Shareholders who are trustees (other than trustees of complying superannuation funds) or partnerships should include dividends and associated franking credits in their net income. A beneficiary of the trust or a partner of the partnership may be entitled to a tax offset in relation to their share of the dividend. There are various rules that need to be satisfied in order to benefit from franking credits. In particular, Shareholders need to have held their Shares at risk for more than 45 days continuously (not including the date of acquisition and disposal) unless they benefit from the small shareholder exception which applies to an individual whose total franking offsets in the relevant year of income do not exceed $5,000. Shareholders should seek their own advice in relation to these rules. 5.6 Tax File Numbers (TFNs) Shareholders are not required to quote their TFN, or where relevant, their Australian Business Number (ABN) to the Murray Goulburn. However, if a valid TFN, ABN or exemption details are not provided, Australian tax may be required to be deducted by Murray Goulburn from unfranked dividends at the maximum marginal tax rate plus the Medicare levy. Australian tax should not be required to be deducted by Murray Goulburn in respect of fully franked dividends. A Shareholder that holds Shares as part of an enterprise may quote their ABN instead of their TFN. Non-residents are exempt from this requirement. 34

37 6 Other information 6.1 Regulatory and third party consents Murray Goulburn is seeking a tax ruling from the ATO in relation to the Capital Structure. If the ATO does not grant the requested ruling it is possible that elements of the Capital Structure may require amendments for it to be implemented. Murray Goulburn has also applied for technical relief from ASX in a number of areas. Although ASX has indicated its preliminary support in relation to these applications, final approval has not yet been obtained. It is possible that final approval will be subject to conditions that require changes to the Capital Structure. Under the terms of its lending arrangements, Murray Goulburn is required to obtain the consent of its lenders before implementing the Capital Structure. As of the date of this notice, Murray Goulburn has not obtained all required financing consents. 6.2 Alternatives to the Capital Structure considered by the Board The Board considered a range of funding options prior to deciding on the proposed Capital Structure. The alternatives considered by the Board included: Increasing bank debt. This can only be done to a certain level within prudent and permitted peak financier covenants. Off balance sheet funding. Murray Goulburn has already pursued this option through the sale and leaseback of the Laverton warehouse and the funding of the new pasteurised milk factories. Limited other opportunities exist. Retention of profits. In order to retain sufficient profit to fund capital expansion it would be necessary to reduce the FMP paid to Suppliers to a level that may no longer be competitive. This is not consistent with one of Murray Goulburn s key objectives of maximising FMP. Raising equity from Shareholders. This is difficult to execute on a large scale given the maximum shareholding limit of 0.5 per cent of Shares on issue. However, Suppliers will be given the opportunity to buy Shares as part of the SSO and Supplier Priority Offer. After extensive consultation with Suppliers and detailed analysis, the Board is of the opinion that the proposed Capital Structure is the best and responsible way to fund the capital investment that will drive increases in the FMP and position Murray Goulburn to pursue its strategy without putting unnecessary strain on the balance sheet. 6.3 Implications if the Capital Structure is not approved As discussed in sections 2.1, and 2.3, if the Capital Structure is not approved it will limit Murray Goulburn s ability to implement its corporate strategy. In addition, Shareholders will not benefit from having a market value for their Shares. 6.4 Timetable for implementation Assuming that the resolutions are passed on 8 May 2015 at each respective meeting, Murray Goulburn intends to implement the Capital Structure on or about 3 July The date is indicative only and may change. Any such change to the timetable will be notified on Murray Goulburn s website at 35

38 7 Independent Expert s Reports Murray Goulburn has commissioned the Independent Expert, Deloitte Corporate Finance Pty Limited, to prepare a report advising whether the proposed Capital Structure is in the best interests of Shareholders as a whole. The Independent Expert has considered the advantages and disadvantages of the proposed Capital Structure and has concluded that the Capital Structure is in the best interests of Shareholders as a whole. The Independent Expert s Report is contained in Attachment 4 of the Capital Structure booklet. Murray Goulburn has also commissioned the Independent Expert to prepare a report advising whether the proposed conversion of Preference Shares is fair and reasonable to the Preference Shareholders as a whole. The Independent Expert has concluded that the conversion of Preference Shares into Non-voting Shares is fair and reasonable to Preference Shareholders. The Independent Expert s Report is contained in Attachment 5 of the Capital Structure booklet. 36

39 8 Proposed changes to Murray Goulburn s Constitution The proposed changes, which will be voted on separately, are set out below: 8.1 Implementation of the Share Standard Rule Proposed change Comments 1.1 Share Standard means the Share Standard adopted by the board (and where required by law ratified by Murray Goulburn in a general meeting), which sets out the number of shares a shareholder is expected to hold in Murray Goulburn, whether by allotment or purchase; Insert definition of Share Standard. 1.1 suppliers equity share means ordinary shares, and such other number or class of shares as the board may by resolution otherwise determine; Delete. No longer required. 3.2 Suppliers equity share scheme Subject always to rule 5.3, if in respect of any financial year of Murray Goulburn the board determines (after taking into consideration any NV class shares held by the member which may be converted to ordinary shares by the board in the exercise of a discretion under rule 4.4) that a supplier: (a) may at the end of such financial year hold less than the required number of suppliers equity shares under the Share Standard for each kilogram of product which the board estimates will be supplied by that supplier to Murray Goulburn during that financial year; or (b) at the end of such financial year held less than the required number of suppliers equity shares under the Share Standard for each kilogram of product which that supplier supplied to Murray Goulburn during that financial year, then the board will require that supplier to, and that supplier will, participate in the suppliers equity share scheme. Insert reference to Share Standard. Delete references to current financial year to provide greater flexibility to use a rolling three-year average, annual milk production as contemplated by the Share Standard. 5.1(b)(i) Suppliers only to hold ordinary and NV shares; proportion between production and holdings of ordinary shares except as specified in paragraph (ii) of this rule 5.1(b), not more than 1:5 the ratio set out in the Share Standard; or Insert reference to Share Standard. 5.1(c) prescribed ratio means, in relation to a supplier, the ratio: S : P where: S is the number of ordinary shares held by the supplier at the end of a supply period; and P is the quantity (in kilograms of milk solids) volume (in litres) of milk supplied by the supplier to Murray Goulburn during the same supply period. Change measurements from litres to kgms. 37

40 8 Proposed changes to Murray Goulburn s Constitution continued 8.2 Replacement of Preference Share provisions Rule Proposed change Comments 1.1 surplus in respect of a financial year means the amount (if any) determined by the board as being available for dividend after payment of: (a) the preferential dividend payable on all of the preference shares and arrears (if any); and (b) a dividend in respect of that financial year at the rate of 8% per annum on the market value of the ordinary shares, and the NV class shares (as determined by the board); No longer required if B and C Class Preference Shares are converted into Non-voting Shares 4.2 Preference shares (a) Subject to the Corporations Act, and notwithstanding any other provisions of this constitution, the board in its discretion may issue preference shares including preference shares which are, and/or at the option of Murray Goulburn and/or the holder thereof are, liable, to be redeemed or convertible into ordinary shares or NV class shares. (b) Save as otherwise specified in this constitution, all preference shares shall rank pari passu. Unless otherwise provided by the terms of issue of any preference share, Murray Goulburn is entitled to issue further preference shares ranking pari passu with its existing preference shares. (c) Unless otherwise provided by the terms of issue of any preference shares, Murray Goulburn is entitled to issue: (i) further non cumulative preference shares ranking pari passu with its existing non cumulative preference shares; and (ii) further cumulative preference shares ranking: (A) pari passu with its existing cumulative preference shares; and (B) (in priority to its existing non cumulative preference shares as regards payment of arrears of dividends. Retain general right to issue Preference Shares, including Convertible Preference Shares. See also changes to rules 7.1 and and B class non cumulative preference shares C class non cumulative preference shares No longer required if B and C Class Preference Shares are converted into Non-voting Shares. 6.1(a) Ordinary Shares Each ordinary share confers on its holder: (a) the right to participate in dividends declared by the board (together with the holders of NV class shares and subject always to the specific rights of the holders of preference shares) and the right in each year to participate rateably with the holders of each of the NV class shares, and the shares referred to in the table in rule 7.4 in any surplus in proportion to the number of shares of each class on issue; No longer required if B and C Class Preference Shares are converted into Non-voting Shares. 38

41 8.2 Replacement of Preference Share provisions continued Rule Proposed change Comments 7.1 Dividend priority ranking (a) Each class of preference share (whether redeemable or non-redeemable and whenever issued) shall have the right to receive out of funds available for dividends (to be determined in accordance with the law and rule 19.1(a)) the respective a preferential dividend, in priority to the payment of any dividend on the ordinary shares and NV class shares, at the rate and on the basis decided by the board under the terms of issueset opposite that class of preference share in the column titled Dividend entitlement in the table in rule 7.4 in accordance with rule 7.2(b). (b) Each class of preference share ranks pari passu with all other classes of preference shares in respect of dividends: (i) save as otherwise specifically referred to in this constitution; and (ii) save that all cumulative preference shares shall rank pari passu with one another but in priority to all classes of non cumulative preference shares to the extent of any deficiency in dividend in respect of the cumulative preference shares, as referred to in rule 7.7. (b) In addition to the preferential dividend and rights on winding up, each preference share may participate with the ordinary shares in profits and assets of the company, including on a winding up, if and to the extent the board decides under the terms of issue. (c) The preferential dividend may be cumulative only if and to the extent the board decides under the terms of issue, and will otherwise be non cumulative. Retain general right to issue Preference Shares. See also changes to rules 4.2 and Rights on redemption or winding up (a) Subject to rule 7.2(b), eeach preference share shall confer on its holder the right on redemption (in the case of redeemable preference shares) and in a winding up to payment in priority to the ordinary shares and NV class shares of: (i) the amount of any dividend accrued but unpaid on the share at the date of winding up or the date of redemptionpayment of all arrears of dividends (whether earned or declared or not) (if applicable) down to the date of redemption or commencement of the winding up in accordance with rule 7.2(b); and (ii) any additional amount specified in the terms of issuethe repayment of the capital paid up or credited as paid up thereon, pari passu with all other classes of preference shares but in priority to any other class of shares,. (b) To the extent the board may decide under the terms of issue, a preference share may confer a right to a bonus issue or capitalisation of profits in favour of holders of those shares only. (c) but with no furthera preference share does not confer on its holder any rights to participate in the profits or assets of Murray Goulburn, except as set out abovewhether surplus or otherwise. (b) Each class of preference share ranks pari passu with all other classes of preference shares: (i) save as otherwise specifically referred to in this constitution; and (ii) save that all non cumulative preference shares shall not have any entitlements under rule 7.2(a)(i). (d) In the case of a redeemable preference share, Murray Goulburn must, at the time and place for redemption specified in, or determined in accordance with, the terms of issue for the share, redeem the share and, on receiving a redemption request under the terms of issue, pay to or at the direction of the holder the amount payable on redemption of the share. Retain general right to issue Preference Shares. See also changes to rules 4.2 and

42 8 Proposed changes to Murray Goulburn s Constitution continued 8.2 Replacement of Preference Share provisions continued Rule Proposed change Comments 7.4 Dividend rights preference shares Subject always to rules 7.1(b) and 7.2(b), the following table specifies the right of each class of preference share to receive dividends out of funds available for dividends (to be determined in accordance with the law and rule 19.1(a)): No longer required if B and C Class Preference Shares are converted into Non-voting Shares. Class of share Dividend entitlement Right to participate in surplus 1 B class non cumulative preference shares A non cumulative preferential dividend per annum at a rate to be determined annually by the board. If the board fails to determine a dividend rate for a particular year, the dividend rate will be the dividend rate which applied for the previous 12 month period. The right in each year to participate rateably with the holders of ordinary shares, NV class shares and the classes of preference shares referred to in item 2 of this table in any surplus in proportion to the number of shares of each class on issue. 2 C class non cumulative preference shares A non cumulative preferential dividend per annum at a rate to be determined annually by the board. If the board fails to determine a dividend rate for a particular year, the dividend rate will be the dividend rate which applied for the previous 12 month period. The right in each year to participate rateably with the holders of ordinary shares, NV class shares and the classes of preference shares referred to in item 1 of this table in any surplus in proportion to the number of shares of each class on issue. 7.6 Ranking for payment of dividends Subject to rules 7.1(b) and 7.2(b) any preferential dividend shall rank for payment in priority to all other issued shares. No longer required. 7.7 Deficiency in dividends If there is a deficiency in dividend in respect of any one year the holders of any cumulative preference shares shall be entitled to have resort to funds available for dividends (to be determined in accordance with the law and rule 19.1(a)) in respect of any subsequent years, in accordance with the provisions of rules 7.1(b) and 7.2(b). No longer required. 40

43 8.3 Changes to conversion mechanics Rule Proposed change Comments 4.1(b) Power to issue shares No NV class share will be issued or allotted except upon a resolution of the board made pursuant to rule 4.4(b)(i)(A). Update cross referencing Classes of shares NV class shares (converted from ordinary shares upon a resolution of the board pursuant to rule 4.4(b)(i)(A)) Update cross referencing. 4.4 Conversion between classes of shares (a) Where the holder ceases to be a supplier or commences to be a supplier (i) If any member who holds any ordinary shares or NV class shares is not a supplier or ceases to be a supplier, the board may by resolution (and in its absolute discretion) convert some or all of that member s: (A) ordinary shares into NV class shares; or (B) ordinary shares and NV class shares into any class of preference shares. (ii) If any member who holds any preference shares or NV class shares is, or becomes, or resumes being, a supplier, or is otherwise entitled to hold ordinary shares or NV class shares under this constitution, the board may by resolution convert some or all of that member s: (A) NV class shares into ordinary shares; or (B) preference shares into ordinary shares or NV class shares. (b) To maintain prescribed ratio (i) The board may by resolution convert any: (A) issued ordinary shares into NV class shares; or (B) issued NV class shares into ordinary shares. (ii) The board must at all times exercise its powers under this rule 4.4(b) with the purpose of furthering the objectives set out in rules 5.1(b) and 5.4. (c) Notifications, annotation of share register and share certificates In respect of any shares converted under this rule 4.4, Murray Goulburn shall forthwith notify in writing any member whose shares have been converted. The holder shall be bound to deliver to Murray Goulburn the share certificates for such shares (if any) for cancellation; however no failure by the holder to deliver the share certificates to Murray Goulburn shall prevent the conversion from taking full and immediate effect upon a notation in respect of the conversion being entered into the register. On registration of the conversion, the share certificates (if any) are considered to have been cancelled. Update to reflect additional conversion scenarios. 4.9(b) Variation of class rights The issue of preference shares, or the conversion of existing shares of any class into preference shares of any other class pursuant to rule 4.4 ranking equally with or in priority to any class or classes of existing shares is expressly permitted and authorised and, subject to the law existing at the time of the issue or conversion, does not constitute a variation of the rights attaching to the said class or classes of existing shares. Update to reflect additional conversion scenarios. 5.1(d) Suppliers only to hold ordinary and NV shares; proportion between production and holdings of ordinary shares (d) NV shares may only be held by suppliers. Delete given Non-voting Shares will be held by former Suppliers and former B and C Class Preference Shareholders. 5.4(a)(ii) Consequences of exceeding maximum shareholding convert all or such number of the member s issued ordinary shares into NV class shares until such time as the breach of the maximum shareholding limit in respect of the member is rectified. Unnecessary. 41

44 ATTACHMENT 1 ORDINARY SHAREHOLDERS Notice of Extraordinary General Meeting Notice is given that a meeting of the Shareholders of Murray Goulburn Co-operative Co. Limited will be held at the RACV City Club, Level 17, 501 Bourke Street, Melbourne on 8 May 2015 at 11.00am (AEST). Items of business Item 1 Capital Structure To consider, and if thought fit, to pass the following resolution as an Ordinary Resolution: The listing of the Unit Trust on the ASX, the Supplier Share Offer and the Supplier Priority Offer, and the establishment of a Shareholder Trading Platform as set out in the accompanying Capital Structure booklet be approved. Item 2 Amendments to the Constitution relating to the Share Standard To consider, and if thought fit, to pass the following resolution as a Special Resolution: Subject to the passing of the resolution in item 1 of the notice of meeting, the Constitution of Murray Goulburn Co-operative Co. Limited be amended in the manner outlined in section 8.1 of the Capital Structure booklet accompanying the notice of meeting, with effect from the Implementation Date. Item 3 Amendments to the Constitution relating to the replacement of Preference Share provisions To consider, and if thought fit, to pass each of the following resolutions as a Special Resolution: (a) Subject to the passing of the resolution in item 1 of the notice of meeting and approval by B Class Preference Shareholders at their meeting to be held on 8 May 2015, the Constitution of Murray Goulburn Co-operative Co. Limited be amended in the manner outlined in section 8.2 of the Capital Structure booklet accompanying the notice of meeting, with effect from the Implementation Date. (b) Subject to the passing of the resolution in item 1 of the notice of meeting and approval by C Class Preference Shareholders at their meeting to be held on 8 May 2015, the Constitution of Murray Goulburn Co-operative Co. Limited be amended in the manner outlined in section 8.2 of the Capital Structure booklet accompanying the notice of meeting, with effect from the Implementation Date. Item 4 Amendments to the Constitution relating to conversion mechanics To consider, and if thought fit, to pass each of the following resolutions as a Special Resolution: (a) Subject to the passing of the resolution in item 1 of the notice of meeting and approval by B Class Preference Shareholders at their meeting to be held on 8 May 2015, the Constitution of Murray Goulburn Co-operative Co. Limited be amended in the manner outlined in section 8.3 of the Capital Structure booklet accompanying the notice of meeting, with effect from the Implementation Date. (b) Subject to the passing of the resolution in item 1 of the notice of meeting and approval by C Class Preference Shareholders at their meeting to be held on 8 May 2015, the Constitution of Murray Goulburn Co-operative Co. Limited be amended in the manner outlined in section 8.3 of the Capital Structure booklet accompanying the notice of meeting, with effect from the Implementation Date. 42

45 Item 5 Consolidation and conversion of B and C Class Preference Shares To consider, and if thought fit, to pass each of the following resolutions as a Special Resolution: (a) Subject to the passing of the resolution in items 1, 3(a) and 4(a) of the notice of meeting and approval by B Class Preference Shareholders at their meeting, and with effect from the Implementation Date, approval be given for all purposes, including for the purposes of sections 246B and 254H of the Corporations Act, for: i. the consolidation of all of the B Class Preference Shares on issue on the Implementation Date in the manner set out in the explanatory notes to this item and that any resulting fractions of a B Class Preference Share be rounded up to the next whole number; and ii. the conversion of all of the B Class Preference Shares on issue, following the consolidation proposed in item 5(a)(i) of the notice of meeting, into Non-voting Shares on the terms set out in the Constitution as amended by the resolutions in items 2, 3(a) and 4(a). (b) Subject to the passing of the resolution in items 1, 3(b) and 4(b) of the notice of meeting and approval by C Class Preference Shareholders at their meeting, and with effect from the Implementation Date, approval be given for all purposes, including for the purposes of sections 246B and 254H of the Corporations Act, for: i. the consolidation of all of the C Class Preference Shares on issue on the Implementation Date in the manner set out in the explanatory notes to this item and that any resulting fractions of a C Class Preference Share be rounded up to the next whole number; and ii. the conversion of all of the C Class Preference Shares on issue, following the consolidation proposed in item 5(b)(i) of the notice of meeting, into Non-voting Shares on the terms set out in the Constitution as amended by the resolutions in items 2, 3(b) and 4(b). Item 6 Increase to aggregate fees paid to non-executive Directors To consider, and if thought fit, pass the following resolution as an Ordinary Resolution: Increase the maximum aggregate amount of remuneration that may be paid in any financial year to Murray Goulburn s non-executive directors as a whole under rule 17.1(b) of the Constitution by $700,000 from $1,300,000 to $2,000,000. Voting restrictions The Company will disregard any votes cast on item 6 as a proxy by a member of Murray Goulburn s key management personnel at the date of the meeting or a closely related party of a member of the key management personnel, unless the vote is cast as proxy for a person who is entitled to vote on item 6, and: the vote is cast in accordance with a direction on the proxy form, or in the absence of a direction on the proxy form, the vote is cast by the Chairman of the meeting and the Chairman has received express authority to vote undirected proxies as the Chairman decides. Further information Please refer to the explanatory notes which accompany, and form part of, this notice of meeting for further information and explanation. Dated: 7 April 2015 By Order of the Board Fiona Smith Company Secretary 43

46 ATTACHMENT 1 ORDINARY SHAREHOLDERS Explanatory Notes The purpose of the explanatory notes is to acquaint you, as a Shareholder of Murray Goulburn, with details of the items of business to be discussed (and the resolutions which are proposed to be considered and voted on) at the meeting. All resolutions relate to, and are required to give effect to, the proposed Capital Structure and the information contained in the accompanying booklet and set out below will assist you in voting on each resolution. Item 1 Capital Structure Murray Goulburn is seeking a voluntary approval from Suppliers to implement the new Capital Structure. The purpose of the new Capital Structure is to fund capital investments to enable the delivery of sustainably higher Farmgate Milk Prices to Suppliers and deliver higher returns for all Shareholders. Details of the Capital Structure can be found in the booklet accompanying this notice of meeting. Please also refer to the Independent Expert s Report contained in Attachment 4 for further analysis of the proposed Capital Structure. If the resolution in item 1 does not pass at the meeting, the Capital Structure will not proceed. Item 2 Amendments to the Constitution relating to implementing the Share Standard Murray Goulburn proposes to make a number of amendments to its Constitution relating to the Capital Structure, specifically to implement the Share Standard. See section 8.1 of the booklet accompanying this notice of meeting for details of the proposed changes. Items 3(a) and 3(b) Amendments to the Constitution of Murray Goulburn relating to the replacement of Preference Share provisions To further assist in facilitating the proposed Capital Structure, amendments are proposed to the Constitution to change the terms of Preference Shares. See section 8.2 of the booklet accompanying this notice of meeting for details of the proposed changes. Given these proposed amendments result in a change to the current terms of B Class Preference Shares, a class meeting of the B Class Preference Shareholders must also approve these changes as a variation of class rights for them to apply to B Class Preference Shares. If the B Class Preference Shareholders do not approve the variation of class rights, the amendment to the Constitution will not take effect. Similarly, this is also a change to the current terms of C Class Preference Shares, and as such a class meeting of the C Class Preference Shareholders must also approve these changes as a variation of class rights for them to apply to C Class Preference Shares. If the C Class Preference Shareholders do not approve the variation of class rights, the amendment to the Constitution will not take effect. Items 4(a) and 4(b) Amendments to the Constitution relating to conversion mechanics To further assist in facilitating the proposed Capital Structure, amendments are proposed to the Constitution to permit the conversion of Preference Shares into Shares (and vice versa). See section 8.3 of the booklet accompanying this notice of meeting for details of the proposed changes. Given these proposed amendments result in a change to the current terms of B Class Preference Shares, a class meeting of the B Class Preference Shareholders must also approve these changes as a variation of class rights for them to apply to B Class Preference Shares. If the B Class Preference Shareholders do not approve the variation of class rights, the amendment to the Constitution will not take effect. Similarly, this is also a change to the current terms of C Class Preference Shares, and as such a class meeting of the C Class Preference Shareholders must also approve these changes as a variation of class rights for them to apply to C Class Preference Shares. If the C Class Preference Shareholders do not approve the variation of class rights, the amendment to the Constitution will not take effect. 44

47 Items 5(a) and 5(b) Consolidation and conversion of B and C Class Preference Shares Approval of Shareholders is being sought for the consolidation and conversion of each of the B and C Class Preference Shares. Section 254H of the Corporations Act provides that an entity may, by resolution passed at a general meeting, convert all or any of its shares into a larger or smaller number. In addition, section 254G of the Corporations Act provides that an entity many convert a preference share into an ordinary share and the variation of class rights provisions will apply to the conversion. Approval of the variation of class rights is required at this meeting and class meetings of each of the B and C Class Preference Shareholders in accordance with section 246B of the Corporations Act. Details of the consolidation and conversion of B and C Class Preference Shares can be found in section of the booklet accompanying this notice of meeting. Terms of Non-voting Shares Each Non-voting Share confers on its holder the same rights and restrictions as those applying to Voting Shares, except that a Non-voting Share does not confer on its holder a right to vote at any general meeting of Murray Goulburn. In summary, the rights of a Non-voting Share are: the right to participate in dividends declared by the board (together with the holders of Voting Shares) and the right in each year to participate rateably with the holders of each of the Voting Shares in any surplus determined in accordance with the Constitution; the right to receive notices of general meeting, reports, balance sheets and profit and loss accounts; the right to attend and be heard (but not vote) at any general meeting of Murray Goulburn; and such other rights as are conferred on Voting Shares under the Constitution. See section of the booklet accompanying this notice of meeting for further details. Key rights of Preference Shares and Non-voting Shares The following is a summary of the key rights attaching to Non-voting Shares and the B and C Class Preference Shares: Feature B and C Class Preference Share Non-voting Share Right to receive notices of meeting and reports Attend general meetings (but no right to vote) Dividends and surplus (preferential annual dividend rate determined by Board) Winding up (preferential repayment of paid up capital but no further rights to participate in profits or assets) (participate in excess which is divided in proportion to shares held) 45

48 ATTACHMENT 1 ORDINARY SHAREHOLDERS Items 5(a) and 5(b) Consolidation and conversion of B and C Class Preference Shares continued Advantages of consolidation and conversion (a) Increased liquidity ability to sell Non-voting Shares Under the new Capital Structure, Non-voting Shares can be sold on the STP and there will be no restriction on the number of Non-voting Shares that can be sold by former B or C Class Preference Shareholders once converted. Non-voting Shares will be able to be sold at the prevailing market price. Currently B and C Class Preference Shares can only be sold through a Murray Goulburn facilitated process. There is no guarantee that this process will continue, particularly if the Capital Structure is implemented but the B or C Class Preference Shares remain on issue (e.g. because the consolidation and conversion of the B or C Class Preference Shares is not approved). Former B or C Class Preference Shareholders will not be able to buy additional Shares on the STP, however they will be able to buy Units on the ASX if they wish. (b) Capital growth potential The Capital Structure will provide former Preference Shareholders with an observable market value for their Shares. Currently, Preference Shareholders are only able to sell their Preference Shares through a Murray Goulburn-facilitated process for $1.00 per Share. (c) Increased certainty of dividends In the future, it is likely that dividend payments on any Preference Shares will decline, particularly if the Capital Structure is not implemented. However, if Preference Shares are converted into Non-voting Shares, Non-voting Shares will be entitled to receive dividends equivalent to Voting Shares. Non-voting Shares will have the same right to any surplus dividends as Voting Shares. Disadvantages of consolidation and conversion (a) Volatility of Share value One of the fundamental principles of the Capital Structure is to provide a market value for Voting Shares and Non-voting Shares, based on the market value of Units on the ASX. The value of Shares will vary over time due to a number of factors including fluctuations in the domestic and international market for listed stocks, general economic conditions (including interest rates, inflation rates, exchange rates, commodity and oil prices or changes to government fiscal, monetary or regulatory policies, legislation or regulation), investor sentiment, man-made or natural events, the inclusion in or removal of the Units from market indices and general market, business and operational risks affecting Murray Goulburn. (b) Non-preferential treatment of dividends Non-voting Shares have no preferential treatment of dividends. Non-voting Shares have the right to receive dividends as declared by the Board. Each year the Board will determine if any dividends are payable on Shares (whether voting or non-voting) and, if so, how much. There is no automatic or fixed dividend rate entitlement for any Shares (whether voting or non-voting), and the Board is not obliged to declare dividends in any financial year. Please refer to section 4 of the booklet accompanying this notice of meeting for advantages and disadvantages in relation to the Capital Structure. Item 6 Increase in the aggregate fees to be paid to non-executive Directors Rule 17.1(b) of the Constitution requires the maximum aggregate amount of non-executive Directors remuneration to be determined by Shareholders in a general meeting. The current maximum aggregate remuneration of the non-executive Directors is $1,300,000 per annum, that fee cap having been set by Shareholders at the 2012 Annual General Meeting. Shareholder approval is sought to increase the maximum total amount available for payment by way of remuneration to non-executive Directors (Fee Pool) by $700,000 to a total of $2,000,000 per annum. Murray Goulburn s remuneration policy targets the median position for total remuneration of the relevant market. The Board recently commissioned Ernst & Young (EY) to undertake a benchmarking review of Murray Goulburn s non-executive Directors fees against a comparator group of companies listed on the ASX (as selected by the Board) in order to understand how Murray Goulburn is positioned compared to the market. 46

49 Item 6 Increase in the aggregate fees to be paid to non-executive Directors continued EY s review highlighted that the fees currently paid to Murray Goulburn s non-executive Directors are well below the respective median positions for ASX comparator group companies. It is therefore proposed to increase the Fee Pool by $700,000 to a total of $2,000,000 to bring Murray Goulburn s fee structure into line with the comparator group companies. While the proposed increase in the Fee Pool is consistent with Murray Goulburn s remuneration policy of targeting the median position, due to the number of non-executive Directors on the Board, the actual fees that would be paid to each non-executive Director would be in line with the 25th percentile position of the comparator group companies. The proposed increase will also aim to: ensure that Murray Goulburn has the ability to pay competitive fees that are aligned with the market, and attract and retain high calibre directors, including Special Directors; and adequately compensate non-executive Directors for the added responsibilities and duties they will be required to perform as directors of the Responsible Entity of the Unit Trust, which is a listed entity with additional and more onerous obligations. Because each non-executive Director has an interest in this matter, the Board does not make a recommendation to Shareholders in relation to voting on this resolution. Information for Shareholders Assistance to shareholders If you require any further explanation of the contents of the notice of meeting, including the explanatory notes, please do not hesitate to contact the Company Secretary, Fiona Smith on (03) If your query relates to the proxy form, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). Conditionality of resolutions The passing of resolutions in items 2, 3(a), 3(b), 4(a), 4(b), 5(a) and 5(b) are dependent or conditional upon the passing of the resolution in item 1. If the resolution in item 1 is not passed, the Capital Structure will not proceed in the manner set out in the booklet accompanying this notice of meeting and none of the resolutions in items 2, 3(a), 3(b), 4(a), 4(b), 5(a) and 5(b) will bind Murray Goulburn and its Shareholders. In addition, the resolutions in items 3(a), 4(a) and 5(a) are conditional upon the passing of the variation of class rights resolution at the meeting of B Class Preference Shareholders. Similarly, the resolution in items 3(b), 4(b) and 5(b) are conditional upon the passing of the variation of class rights resolution at the meeting of C Class Preference Shareholders. Voting recommendation The Board unanimously recommends that Shareholders support each resolution referred to in items 1 to 5 for the reasons outlined in the explanatory notes and booklet accompanying this notice. Each Supplier Director intends to vote all of their Shares in favour of those resolutions. Because each non-executive Director has an interest in item 6, the Board does not make a recommendation to Shareholders in relation to voting on item 6. Share classes and voting entitlement Only registered holders of Voting Shares are entitled to vote at the meeting. The Board has determined that for the purpose of identifying a Shareholder s entitlement to vote at the meeting, a person will be recognised as the holder of a Voting Share(s) if the person is registered as the holder of those shares on Murray Goulburn s share register as at 5.00pm (AEST) on 27 April

50 ATTACHMENT 1 ORDINARY SHAREHOLDERS Voting at the Meeting It is intended that voting will be conducted by a poll. On a poll, every Shareholder present shall have one vote for each Voting Share held by the Shareholder. If two or more persons are joint holders of a Voting Share, any one of the joint holders present may vote at the meeting as if that joint holder were solely entitled to the share. If more than one of the joint holders are present at the meeting, the joint holder named first in the register of members in respect of the Voting Share will be entitled to vote, to the exclusion of the others. A Shareholder is not entitled to vote at the meeting unless all calls and other sums of money presently payable by that Shareholder in respect of Shares have been paid. Appointing a proxy A Shareholder entitled to attend and vote at the meeting will be entitled to appoint not more than two proxies and, if two proxies are appointed, may specify the proportion or number of votes each proxy is appointed to exercise. If a Shareholder appoints two proxies and the appointment does not specify the proportion or number of the Shareholder s votes, each proxy may exercise half of the votes. A proxy form is enclosed with this notice. Please also refer to the paragraph headed Limit on proxy and representative appointments below which describes the Constitutional limits on the number of appointments any proxy or representative can have. A proxy need not be a Shareholder of Murray Goulburn. The proxy form must be completed in writing and signed or sealed by or on behalf of the appointer. At least 48 hours before the time for holding the meeting (that is, prior to 11.00am (AEST) on 6 May 2015): the proxy form; and the power of attorney or authority (if any) under which the proxy form is signed, or a notarially certified copy of the power of attorney or authority, must be deposited by one of the following methods: In person: Murray Goulburn Co-operative Co. Limited Level 15, Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 By mail: Returning Officer Murray Goulburn Co-operative Co. Limited GPO Box 2062 Melbourne VIC 8060 By fax: (03) By computershare. com. au 48

51 Appointing a proxy continued The proxy form will not be treated as valid if these requirements are not satisfied. If a replacement proxy form is required, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). To the extent that the Chairman holds: a directed proxy (i.e. a proxy form in which the holder of shares directs the Chairman how to vote on a resolution), the Chairman will use his vote on that resolution in the manner in which he is directed under that proxy form; and an undirected proxy (i.e. a proxy form in which the holder of shares does not direct the Chairman how to vote on a resolution, but leaves it to the discretion of the Chairman), the Chairman intends to use his vote on that resolution to vote in favour of the resolution. If a Shareholder appoints a proxy and then the Shareholder attends the meeting, the proxy s authority to speak and vote for that Shareholder at the meeting is suspended while the Shareholder is present at the meeting. Default to Chairman Shareholders who return their proxy forms with a direction on how to vote but do not nominate the identity of their proxy will be taken to have appointed the Chairman of the meeting as their proxy to vote on their behalf. If a proxy form is returned but the nominated proxy does not attend the meeting, or does not vote on a poll on the resolution, the Chairman of the meeting will act in place of the nominated proxy and vote in accordance with any instructions. Proxy appointments in favour of the Chairman of the meeting, the Company Secretary or any Director that do not contain a direction on how to vote will be used where possible to support each of the resolutions proposed in the notice. Appointing a corporate representative A corporation which is a Shareholder of Murray Goulburn may, by resolution of its directors or other governing body, authorise any person as it thinks fit to act as its representative at the meeting. The person authorised will be entitled to exercise the same powers on behalf of the corporation which that person represents as the corporation could exercise if it were an individual Shareholder of Murray Goulburn, provided that such authorisation be made in writing under the seal of the corporation at the time and in a manner required for notification of proxies or attorneys. Limit on proxy and representative appointments Under Murray Goulburn s Constitution, no person may seek or accept appointment, or hold or exercise any appointment, as a proxy or representative for any Shareholder or Shareholders of Murray Goulburn where the appointment is in respect of: more than five Shareholders of Murray Goulburn; or Voting Shares which are greater in number than the number which is 0.5 per cent of the aggregate number of all Voting Shares on issue as at the date of the meeting or resolution. The Chairman must disallow any votes which any proxy or representative seeks to exercise and which are in excess of those limits. This prohibition does not apply to proxies held by the Chairman which are exercised or to be exercised at that meeting. 49

52 ATTACHMENT 2 B CLASS PREFERENCE SHAREHOLDERS Notice of Class Meeting for B Class Preference Shareholders ONLY Notice is given that a meeting of the B Class Preference Shareholders of Murray Goulburn Co-operative Co. Limited will be held at the RACV City Club, Level 17, 501 Bourke Street, Melbourne on 8 May 2015 at 1.00pm (AEST). Items of business Item 1 Variation of class rights To consider, and if thought fit, to pass the following resolution as a Special Resolution: That B Class Preference Shareholders agree and consent to any variation of class rights attaching to B Class Preference Shares resulting from: (a) amendments to the Constitution of Murray Goulburn Co-operative Co. Limited, approved by Shareholders at an Extraordinary General Meeting on 8 May 2015; (b) the effect of consolidating B Class Preference Shares in the manner outlined in the explanatory notes for this item; and (c) the conversion of the consolidated B Class Preference Shares into Non-voting Shares carrying the rights and obligations set out in the Constitution as amended by Shareholders at an Extraordinary General Meeting on 8 May Further information Please refer to the explanatory notes which accompany, and form part of, this notice of meeting for further information and explanation. Dated: 7 April 2015 By Order of the Board Fiona Smith Company Secretary 50

53 Explanatory Notes The purpose of the explanatory notes is to acquaint you, as a B Class Preference Shareholder of Murray Goulburn, with details of the item of business to be discussed (and the resolution which is proposed to be considered and voted on) at the meeting. The resolution relates to, and is required to give effect to, the proposed Capital Structure. The information contained in the accompanying booklet and set out below will assist you in voting on the resolution. Item 1 Variation of class rights In accordance with the Board s intention to implement a new Capital Structure as expressed at the B Class Preference Shareholder meeting on 27 November 2014, Murray Goulburn is now seeking approval for the purposes of section 246B of the Corporations Act for a variation of class rights resulting from: amendments to the Constitution; the consolidation of B Class Preference Shares; and the conversion of B Class Preference Shares into Non-voting Shares. This approval is necessary to simplify the share structure of Murray Goulburn and give effect to the new Capital Structure and enable the B Class Preference Shareholders to participate in it. Details of the Capital Structure can be found in the booklet accompanying this notice of meeting. In particular, details of the proposed amendments to the Constitution can be found in sections 3.6 and 8, and details of the consolidation and conversion of B and C Class Preference Shares can be found in section Please also refer to the Independent Expert s Reports contained in Attachment 4 for further analysis of the proposed Capital Structure and Attachment 5 for the consolidation and conversion of Preference Shares. The Independent Expert has concluded that the consolidation and conversion of B Class Preference Shares is fair and reasonable to B Class Preference Shareholders. If the amendments to the Constitution, including the consolidation and conversion are approved by Shareholders and the variation of class rights is approved by B Class Preference Shareholders, the consolidation and conversion of B Class Preference Shares will take effect from the Implementation Date (or such other subsequent date as notified by Murray Goulburn). Where the consolidation results in an entitlement to a fraction of a B Class Preference Share, the fraction will be rounded up to the nearest whole number of shares. If Murray Goulburn reasonably believes that a B Class Preference Shareholder has been a party to the division of a shareholding in an attempt to obtain an advantage from this treatment of fractions, Murray Goulburn may take appropriate action, having regard as appropriate to the terms of the Constitution. In particular, the Company reserves the right to disregard the division of the shareholding for the purposes of dealing with fractions so as to round up any fraction to the nearest whole number of shares that would be been received but for the division. If the variation of class rights is not approved by B Class Preference Shareholders, or the proposed Capital Structure is not implemented, then B Class Preference Shareholders will retain their Preference Shares on their current terms and will only be able to sell them through a Murray Goulburn-facilitated process for $1.00 per Share (assuming this process is retained, which is not guaranteed). 51

54 ATTACHMENT 2 B CLASS PREFERENCE SHAREHOLDERS Item 1 Variation of class rights continued Amendments to the Constitution To facilitate the proposed Capital Structure, amendments are proposed to the Constitution to permit the conversion of Preference Shares into Shares (and vice versa). See section 8.2 and 8.3 of the booklet accompanying this notice of meeting for details of the proposed changes. Terms of Non-voting Shares Each Non-voting Share confers on its holder the same rights and restrictions as those applying to Voting Shares, except that a Non-voting Share does not confer on its holder a right to vote at any general meeting of Murray Goulburn. In summary, the rights of a Non-voting Share are: the right to participate in dividends declared by the board (together with the holders of Voting Shares) and the right in each year to participate rateably with the holders of each of the Voting Shares in any surplus determined in accordance with the Constitution; the right to receive notices of general meeting, reports, balance sheets and profit and loss accounts; the right to attend and be heard (but not vote) at any general meeting of Murray Goulburn; and such other rights as are conferred on Voting Shares under the Constitution. See section of the booklet accompanying this notice of meeting for further details. Key rights of B Class Preference Shares and Non-voting Shares The following is a summary of the key rights attaching to B Class Preference Shares and Non-voting Shares: Feature B Class Preference Share Non-voting Share Right to receive notices of meeting and reports Attend general meetings (but no right to vote) Dividends and surplus (preferential annual dividend rate determined by Board) Winding up (preferential repayment of paid up capital but no further rights to participate in profits or assets) (participate in excess which is divided in proportion to shares held) Advantages of consolidation and conversion (a) Increased liquidity ability to sell Non-voting Shares Under the new Capital Structure, Non-voting Shares can be sold on the STP and there will be no restriction on the number of Non-voting Shares that can be sold by former B or C Class Preference Shareholders once converted. Non-voting Shares will be able to be sold at the prevailing market price. Currently B Class Preference Shares can only be sold through a Murray Goulburn facilitated process. There is no guarantee that this process will continue, particularly if the Capital Structure is implemented but the B Class Preference Shares remain on issue (e.g. because the consolidation and conversion of the B Class Preference Shares is not approved). Former B Class Preference Shareholders will not be able to buy additional Shares on the STP, however they will be able to buy Units on the ASX if they wish. (b) Capital growth potential The Capital Structure will provide B Class Preference Shareholders with an observable market value for their Shares. Currently, B Class Preference Shareholders are only able to sell their B Class Preference Shares through a Murray Goulburn-facilitated process for $1.00 per Share. 52

55 Item 1 Variation of class rights continued (c) Increased certainty of dividends In the future, it is likely that dividend payments on B Class Preference Shares will decline, particularly if the Capital Structure is not implemented. However, if B Class Preference Shares are converted into Non-voting Shares, Non-voting Shares will be entitled to receive dividends equivalent to Voting Shares. Non-voting Shares will have the same right to any surplus dividends as Voting Shares. Disadvantages of consolidation and conversion (a) Volatility of Share value One of the fundamental principles of the Capital Structure is to provide a market value for Voting Shares and Non-voting Shares, based on the market value of Units on the ASX. The value of Voting Shares and Non-voting Shares will vary over time due to a number of factors including fluctuations in the domestic and international market for listed stocks, general economic conditions (including interest rates, inflation rates, exchange rates, commodity and oil prices or changes to government fiscal, monetary or regulatory policies, legislation or regulation), investor sentiment, man-made or natural events, the inclusion in or removal of the Units from market indices and general market, business and operational risks affecting Murray Goulburn. (b) Non-preferential treatment of dividends Non-voting Shares have no preferential right to receive dividends. Non-voting Shares have the right to receive dividends as declared by the Board. Each year the Board will determine if any dividends are payable on Shares (whether voting or non-voting) and, if so, how much. There is no automatic or fixed dividend rate entitlement for any Shares (whether voting or non-voting), and the Board is not obliged to declare dividends in any financial year. Other information Please refer to section 4 of the booklet the for advantages and disadvantages in relation to the Capital Structure. Please also refer to the Independent Expert s Reports contained in Attachments 4 and 5. Other than as set out in this document, and other than information previously disclosed to B Class Preference Shareholders, there is no other information that is known to Murray Goulburn s Directors which may reasonably be expected to be material to the making of a decision whether or not to vote in favour of the consolidation and conversion. Information for Shareholders Assistance to shareholders If you require any further explanation of the contents of the notice of meeting, including the explanatory notes, please do not hesitate to contact the Company Secretary, Fiona Smith on (03) If your query relates to the proxy form, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). Voting recommendation The Board unanimously recommends that B Class Preference Shareholders support the resolution referred to in item 1 for the reasons outlined in the explanatory notes and accompanying booklet. Voting entitlement Only registered holders of B Class Preference Shares are entitled to vote at the meeting. The Board has determined that for the purpose of identifying a B Class Preference Shareholder s entitlement to vote at the meeting, a person will be recognised as the holder of a B Class Preference Share(s) if the person is registered as the holder of those shares on Murray Goulburn s share register as at 5.00pm (AEST) on 27 April

56 ATTACHMENT 2 B CLASS PREFERENCE SHAREHOLDERS Voting at the Meeting It is intended that voting will be conducted by a poll. On a poll, every B Class Preference Shareholder present shall have one vote for each B Class Preference Share held by the shareholder. If two or more persons are joint holders of a B Class Preference Share, any one of the joint holders present may vote at the meeting as if that joint holder were solely entitled to the share. If more than one of the joint holders are present at the meeting, the joint holder named first in the register of members in respect of the share will be entitled to vote, to the exclusion of the others. A B Class Preference Shareholder is not entitled to vote at the meeting unless all calls and other sums of money presently payable by that shareholder in respect of shares have been paid. Appointing a proxy A B Class Preference Shareholder entitled to attend and vote at the meeting will be entitled to appoint not more than two proxies and, if two proxies are appointed, may specify the proportion or number of votes each proxy is appointed to exercise. If a shareholder appoints two proxies and the appointment does not specify the proportion or number of the shareholder s votes, each proxy may exercise half of the votes. A proxy form is enclosed with this notice. Please also refer to the paragraph headed Limit on proxy and representative appointments below which describes the Constitutional limits on the number of appointments any proxy or representative can have. A proxy need not be a shareholder of Murray Goulburn. The proxy form must be completed in writing and signed or sealed by or on behalf of the appointer. At least 48 hours before the time for holding the meeting (that is, prior to 1.00pm (AEST) on 6 May 2015): the proxy form; and the power of attorney or authority (if any) under which the proxy form is signed, or a notarially certified copy of the power of attorney or authority, must be deposited by one of the following methods: In person: Murray Goulburn Co-operative Co. Limited Level 15, Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 By mail: Returning Officer Murray Goulburn Co-operative Co. Limited GPO Box 2062 Melbourne VIC 8060 By fax: (03) By computershare. com. au 54

57 Appointing a proxy continued The proxy form will not be treated as valid if these requirements are not satisfied. If a replacement proxy form is required, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). To the extent that the Chairman holds: a directed proxy (i.e. a proxy form in which the holder of shares directs the Chairman how to vote on a resolution), the Chairman will use his vote on that resolution in the manner in which he is directed under that proxy form; and an undirected proxy (i.e. a proxy form in which the holder of shares does not direct the Chairman how to vote on a resolution, but leaves it to the discretion of the Chairman), the Chairman intends to use his vote on that resolution to vote in favour of the resolution. If a B Class Preference Shareholder appoints a proxy and then the shareholder attends the meeting, the proxy s authority to speak and vote for that shareholder at the meeting is suspended while the shareholder is present at the meeting. Default to Chairman B Class Preference Shareholders who return their proxy forms with a direction on how to vote but do not nominate the identity of their proxy will be taken to have appointed the Chairman of the meeting as their proxy to vote on their behalf. If a proxy form is returned but the nominated proxy does not attend the meeting, or does not vote on a poll on the resolution, the Chairman of the meeting will act in place of the nominated proxy and vote in accordance with any instructions. Proxy appointments in favour of the Chairman of the meeting, the Company Secretary or any Director that do not contain a direction on how to vote will be used where possible to support the resolution proposed in the notice. Appointing a corporate representative A corporation which is a B Class Preference Shareholder of Murray Goulburn may, by resolution of its directors or other governing body, authorise any person as it thinks fit to act as its representative at the meeting. The person authorised will be entitled to exercise the same powers on behalf of the corporation which that person represents as the corporation could exercise if it were an individual shareholder of Murray Goulburn, provided that such authorisation be made in writing under the seal of the corporation at the time and in a manner required for notification of proxies or attorneys. Limit on proxy and representative appointments Under Murray Goulburn s Constitution, no person may seek or accept appointment, or hold or exercise any appointment, as a proxy or representative for any shareholder or shareholders of Murray Goulburn where the appointment is in respect of: more than five shareholders of Murray Goulburn; or shares which are greater in number than the number which is 0.5 per cent of the aggregate number of all shares on issue as at the date of the meeting or resolution. The Chairman must disallow any votes which any proxy or representative seeks to exercise and which are in excess of those limits. This prohibition does not apply to proxies held by the Chairman which are exercised or to be exercised at that meeting. 55

58 ATTACHMENT 3 C CLASS PREFERENCE SHAREHOLDERS Notice of Class Meeting for C Class Preference Shareholders ONLY Notice is given that a meeting of the C Class Preference Shareholders of Murray Goulburn Co-operative Co. Limited will be held at the RACV City Club, Level 17, 501 Bourke Street, Melbourne on 8 May 2015 at 1.15pm (AEST). Items of business Item 1 Variation of class rights To consider, and if thought fit, to pass the following resolution as a Special Resolution: That C Class Preference Shareholders agree and consent to any variation of class rights attaching to C Class Preference Shares resulting from: (a) amendments to the Constitution of Murray Goulburn Co-operative Co. Limited approved by Shareholders at an Extraordinary General Meeting on 8 May 2015; (b) the effect of consolidating C Class Preference Shares in the manner outlined in the explanatory notes for this item; and (c) the conversion of the consolidated C Class Preference Shares into Non-voting Shares carrying the rights and obligations set out in the Constitution as amended by Shareholders at an Extraordinary General Meeting on 8 May Further information Please refer to the explanatory notes which accompany, and form part of, this notice of meeting for further information and explanation. Dated: 7 April 2015 By Order of the Board Fiona Smith Company Secretary 56

59 Explanatory Notes The purpose of the explanatory notes is to acquaint you, as a C Class Preference Shareholder of Murray Goulburn, with details of the item of business to be discussed (and the resolution which is proposed to be considered and voted on) at the meeting. The resolution relates to, and is required to give effect to, the proposed Capital Structure. The information contained in the accompanying booklet and set out below will assist you in voting the each resolution. Item 1 Variation of class rights In accordance with the Board s intention to implement a new Capital Structure as expressed at the C Class Preference Shareholder meeting on 27 November 2014, Murray Goulburn is now seeking approval for the purposes of section 246B of the Corporations Act for a variation of class rights resulting from: amendments to the Constitution; the consolidation of C Class Preference Shares; and the conversion of C Class Preference Shares into Non-voting Shares. This approval is necessary to simplify the share structure of Murray Goulburn and give effect to the new Capital Structure and enable the C Class Preference Shareholders to participate in it. Details of the Capital Structure can be found in the booklet accompanying this notice of meeting. In particular, details of the proposed amendments to the Constitution can be found in sections 3.6 and 8, and details of the consolidation and conversion of B and C Class Preference Shares can be found in section Please also refer to the Independent Expert s Reports contained in Attachment 4 for further analysis of the proposed Capital Structure and Attachment 5 for the consolidation and conversion of Preference Shares. The Independent Expert has concluded that the consolidation and conversion of C Class Preference Shares is fair and reasonable to C Class Preference Shareholders. If the amendments to the Constitution, including the consolidation and conversion are approved by Shareholders and the variation of class rights is approved by C Class Preference Shareholders, the consolidation and conversion of C Class Preference Shares will take effect from the Implementation Date (or such other subsequent date as notified by Murray Goulburn). Where the consolidation results in an entitlement to a fraction of a C Class Preference Share, the fraction will be rounded up to the nearest whole number of shares. If Murray Goulburn reasonably believes that a C Class Preference Shareholder has been a party to the division of a shareholding in an attempt to obtain an advantage from this treatment of fractions, Murray Goulburn may take appropriate action, having regard as appropriate to the terms of the Constitution. In particular, the Company reserves the right to disregard the division of the shareholding for the purposes of dealing with fractions so as to round up any fraction to the nearest whole number of shares that would be been received but for the division. If the variation of class rights is not approved by C Class Preference Shareholders, or the proposed Capital Structure is not implemented, then C Class Preference Shareholders will retain their Preference Shares on their current terms and will only be able to sell them through a Murray Goulburn-facilitated process for $1.00 per Share (assuming this process is retained, which is not guaranteed). 57

60 ATTACHMENT 3 C CLASS PREFERENCE SHAREHOLDERS Item 1 Variation of class rights continued Amendments to the Constitution To facilitate the proposed Capital Structure, amendments are proposed to the Constitution to permit the conversion of Preference Shares into Shares (and vice versa). See section 8.2 and 8.3 of the booklet accompanying this notice of meeting for details of the proposed changes. Terms of Non-voting Shares Each Non-voting Share confers on its holder the same rights and restrictions as those applying to Voting Shares, except that a Non-voting Share does not confer on its holder a right to vote at any general meeting of Murray Goulburn. In summary, the rights of a Non-voting Share are: the right to participate in dividends declared by the board (together with the holders of Voting Shares) and the right in each year to participate rateably with the holders of each of the Voting Shares in any surplus determined in accordance with the Constitution; the right to receive notices of general meeting, reports, balance sheets and profit and loss accounts; the right to attend and be heard (but not vote) at any general meeting of Murray Goulburn; and such other rights as are conferred on ordinary shares under the Constitution. See section of the booklet accompanying this notice of meeting for further details. Key rights of C Class Preference Shares and Non-voting Shares The following is a summary of the key rights attaching to C Class Preference Shares and Non-voting Shares: Feature C Class Preference Share Non-voting Share Right to receive notices of meeting and reports Attend general meetings (but no right to vote) Dividends and surplus (preferential annual dividend rate determined by Board) Winding up (preferential repayment of paid up capital but no further rights to participate in profits or assets) (participate in excess which is divided in proportion to shares held) Advantages of consolidation and conversion (a) Increased liquidity ability to sell Non-voting Shares Under the new Capital Structure, Non-voting Shares can be sold on the STP and there will be no restriction on the number of Non-voting Shares that can be sold by former C Class Preference Shareholders once converted. Non-voting Shares will be able to be sold at the prevailing market price. Currently C Class Preference Shares can only be sold through a Murray Goulburn facilitated process. There is no guarantee that this process will continue, particularly if the Capital Structure is implemented but C Class Preference Shares remain on issue (e.g. because the consolidation and conversion of C Class Preference Shares is not approved). Former C Class Preference Shareholders will not be able to buy additional Shares on the STP, however they will be able to buy Units on the ASX if they wish. (b) Capital growth potential One of the fundamental principles of the Capital Structure is to provide a market value for Shares and Non-voting Shares, based on the market value of Units on the ASX. The Capital Structure will provide C Class Preference Shareholders with an observable market value for their shares. Currently, C Class Preference Shareholders are only able to sell their C Class Preference Shares through a Murray Goulburn-facilitated process for $1.00 per Share. 58

61 Item 1 Variation of class rights continued (c) Increased certainty of dividends In the future, it is likely that dividend payments on any C Class Preference Shares will decline, particularly if the Capital Structure is not implemented. However, if C Class Preference Shares are converted into Non-voting Shares, Non-voting Shares will be entitled to receive dividends equivalent to Voting Shares. Non-voting Shares will have the same right to any surplus dividends as Voting Shares. Disadvantages of consolidation and conversion (a) Volatility of Share value One of the fundamental principles of the Capital Structure is to provide a market value for Voting Shares and Non-voting Shares, based on the market value of Units on the ASX. The value of Voting Shares and Non-voting Shares will vary over time due to a number of factors including fluctuations in the domestic and international market for listed stocks, general economic conditions (including interest rates, inflation rates, exchange rates, commodity and oil prices or changes to government fiscal, monetary or regulatory policies, legislation or regulation), investor sentiment, man-made or natural events, the inclusion in or removal of the Units from market indices and general market, business and operational risks affecting Murray Goulburn. (b) Dividends Non-voting Shares do not have a preferential right to receive dividends. Non-voting Shares have the right to receive dividends as declared by the Board. Each year the Board will determine if any dividends are payable on Shares (whether voting or non-voting) and, if so, how much. There is no automatic or fixed dividend rate entitlement for any Shares (whether voting or non-voting), and the Board is not obliged to declare dividends in any financial year. Other information Please refer to section 4 of the booklet accompanying this notice of meeting for advantages and disadvantages in relation to the Capital Structure. Please also refer to the Independent Expert s Reports contained in Attachments 4 and 5. Other than as set out in this document, and other than information previously disclosed to C Class Preference Shareholders, there is no other information that is known to Murray Goulburn s Directors which may reasonably be expected to be material to the making of a decision whether or not to vote in favour of the consolidation and conversion. Information for Shareholders Assistance to shareholders If you require any further explanation of the contents of the notice of meeting, including the explanatory notes, please do not hesitate to contact the Company Secretary, Fiona Smith on (03) If your query relates to the proxy form, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). Voting recommendation The Board unanimously recommends that C Class Preference Shareholders support the resolution referred to in item 1 for the reasons outlined in the explanatory notes and accompanying booklet. Share classes and voting entitlement Only registered holders of C Class Preference Shares are entitled to vote at the meeting. The Board has determined that for the purpose of identifying a C Class Preference Shareholder s entitlement to vote at the meeting, a person will be recognised as the holder of a C Class Preference Share(s) if the person is registered as the holder of those shares on Murray Goulburn s share register as at 5.00pm (AEST) on 27 April

62 ATTACHMENT 3 C CLASS PREFERENCE SHAREHOLDERS Voting at the Meeting It is intended that voting will be conducted by a poll. On a poll, every C Class Preference Shareholder present shall have one vote for each C Class Preference Share held by the shareholder. If two or more persons are joint holders of a C Class Preference Share, any one of the joint holders present may vote at the meeting as if that joint holder were solely entitled to the share. If more than one of the joint holders are present at the meeting, the joint holder named first in the register of members in respect of the share will be entitled to vote, to the exclusion of the others. A C Class Preference Shareholder is not entitled to vote at the meeting unless all calls and other sums of money presently payable by that shareholder in respect of shares have been paid. Appointing a proxy A C Class Preference Shareholder entitled to attend and vote at the meeting will be entitled to appoint not more than two proxies and, if two proxies are appointed, may specify the proportion or number of votes each proxy is appointed to exercise. If a shareholder appoints two proxies and the appointment does not specify the proportion or number of the shareholder s votes, each proxy may exercise half of the votes. A proxy form is enclosed with this notice. Please also refer to the paragraph headed Limit on proxy and representative appointments below which describes the Constitutional limits on the number of appointments any proxy or representative can have. A proxy need not be a shareholder of Murray Goulburn. The proxy form must be completed in writing and signed or sealed by or on behalf of the appointer. At least 48 hours before the time for holding the meeting (that is, prior to 1.15pm (AEST) on 6 May 2015): the proxy form; and the power of attorney or authority (if any) under which the proxy form is signed, or a notarially certified copy of the power of attorney or authority, must be deposited by one of the following methods: In person: Murray Goulburn Co-operative Co. Limited Level 15, Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 By mail: Returning Officer Murray Goulburn Co-operative Co. Limited GPO Box 2062 Melbourne VIC 8060 By fax: (03) By omputershare. com. au The proxy form will not be treated as valid if these requirements are not satisfied. 60

63 Appointing a proxy continued If a replacement proxy form is required, please contact Computershare Investor Services Pty Limited on (within Australia) or (outside Australia). To the extent that the Chairman holds: a directed proxy (i.e. a proxy form in which the holder of shares directs the Chairman how to vote on a resolution), the Chairman will use his vote on that resolution in the manner in which he is directed under that proxy form; and an undirected proxy (i.e. a proxy form in which the holder of shares does not direct the Chairman how to vote on a resolution, but leaves it to the discretion of the Chairman), the Chairman intends to use his vote on that resolution to vote in favour of the resolution. If a C Class Preference Shareholder appoints a proxy and then the shareholder attends the meeting, the proxy s authority to speak and vote for that shareholder at the meeting is suspended while the shareholder is present at the meeting. Default to Chairman C Class Preference Shareholders who return their proxy forms with a direction on how to vote but do not nominate the identity of their proxy will be taken to have appointed the Chairman of the meeting as their proxy to vote on their behalf. If a proxy form is returned but the nominated proxy does not attend the meeting, or does not vote on a poll on the resolution, the Chairman of the meeting will act in place of the nominated proxy and vote in accordance with any instructions. Proxy appointments in favour of the Chairman of the meeting, the Company Secretary or any Director that do not contain a direction on how to vote will be used where possible to support the resolution proposed in the notice. Appointing a corporate representative A corporation which is a C Class Preference Shareholder of Murray Goulburn may, by resolution of its directors or other governing body, authorise any person as it thinks fit to act as its representative at the meeting. The person authorised will be entitled to exercise the same powers on behalf of the corporation which that person represents as the corporation could exercise if it were an individual shareholder of Murray Goulburn, provided that such authorisation be made in writing under the seal of the corporation at the time and in a manner required for notification of proxies or attorneys. Limit on proxy and representative appointments Under Murray Goulburn s Constitution, no person may seek or accept appointment, or hold or exercise any appointment, as a proxy or representative for any shareholder or shareholders of Murray Goulburn where the appointment is in respect of: more than five shareholders of Murray Goulburn; or shares which are greater in number than the number which is 0.5 per cent of the aggregate number of all shares on issue as at the date of the meeting or resolution. The Chairman must disallow any votes which any proxy or representative seeks to exercise and which are in excess of those limits. This prohibition does not apply to proxies held by the Chairman which are exercised or to be exercised at that meeting. 61

64 ATTACHMENT 4 ORDINARY SHAREHOLDERS Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 7 April

65 Financial Services Guide What is a Financial Services Guide? This Financial Services Guide (FSG) provides important information to assist you in deciding whether to use our services. This FSG includes details of how we are remunerated and deal with complaints. Where you have engaged us, we act on your behalf when providing financial services. Where you have not engaged us, we act on behalf of our client when providing these financial services, and are required to give you an FSG because you have received a report or other financial services from us. The person who provides the advice is an Authorised Representative (AR) of Deloitte Corporate Finance Pty Limited, which authorises the AR to distribute this FSG. Their AR number is included in the report which accompanies this FSG. What financial services are we licensed to provide? We are authorised to provide financial product advice and to arrange for another person to deal in financial products in relation to securities, interests in managed investment schemes, government debentures, stocks or bonds to retail and wholesale clients. We are also authorised to provide personal and general financial product advice and deal by arranging in derivatives and regulated emissions units to wholesale clients, and general financial product advice relating to derivatives to retail clients. Our general financial product advice Where we have issued a report, our report contains only general advice. This advice does not take into account your personal objectives, financial situation or needs. You should consider whether our advice is appropriate for you, having regard to your own personal objectives, financial situation or needs. If our advice is provided to you in connection with the acquisition of a financial product you should read the relevant offer document carefully before making any decision about whether to acquire that product. How are we and all employees remunerated? We will receive a fee of approximately $275,000 exclusive of GST in relation to the preparation of both this report and the report prepared for preference shareholders. This fee is not contingent upon the success or otherwise of the implementation of the proposed capital structure. Other than our fees, we, our directors and officers, any related bodies corporate, affiliates or associates and their directors and officers, do not receive any commissions or other benefits. All employees receive a salary and while eligible for annual salary increases and bonuses based on overall performance they do not receive any commissions or other benefits as a result of the services provided to you. 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66 ATTACHMENT 4 ORDINARY SHAREHOLDERS Deloitte Corporate Finance Pty Limited A.B.N AFSL Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia DX 111 Tel: Fax: The Directors Murray Goulburn Co-operative Co. Limited Level 15, Freshwater Place, 2 Southbank Boulevard Southbank VIC April 2015 Dear Directors Independent expert s report Introduction Murray Goulburn Co-operative Co. Limited (MG) is considering implementing a new capital structure (the Proposed Capital Structure), which would, inter alia, involve raising up to $500 million from external investors (the Unitholders) via an initial public offering (IPO) of units (the Units) to be issued by a unit trust (the Unit Trust) listed on the Australian Securities Exchange (ASX). The board of directors of MG (the Board) prepared a booklet (the Capital Structure Booklet) to accompany a Notice of Meeting for the Extraordinary General Meeting containing the detailed terms of the Proposed Capital Structure and an overview of the Proposed Capital Structure is provided in Section 1 of our report. Purpose of the report Whilst an independent expert s report in respect of the Proposed Capital Structure is not required to meet any statutory obligations, the directors of MG (the Directors) have requested that Deloitte Corporate Finance Pty Limited (Deloitte Corporate Finance) provide an independent expert s report advising whether, in our opinion, the Proposed Capital Structure is in the best interests of the holders of ordinary shares in MG (the Ordinary Shareholders) as a whole. We have prepared this report having regard to Australian Securities and Investments Commission (ASIC) Regulatory Guide 111 in relation to the content of expert s reports and ASIC Regulatory Guide 112 in respect of the independence of experts. The Regulatory Guides prescribe standards of best practice in the preparation of independent expert s reports. This report is to be included in the Capital Structure Booklet to be sent to Ordinary Shareholders and has been prepared for the exclusive purpose of assisting Ordinary Shareholders in their consideration of the Proposed Capital Structure. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the Ordinary Shareholders and MG, in respect of this report, including any errors or omissions however caused. Basis of evaluation The Proposed Capital Structure will be implemented through a series of interrelated transactions and agreements. While we have had regard to the impact of each individual component of the Proposed Capital Structure on the Ordinary Shareholders, we have reached our opinion as to whether the Proposed Capital Structure is in the best interests of the Ordinary Shareholders as a whole based on the anticipated overall outcome of the implementation of the Proposed Capital Structure in its totality. We note that, in our assessment, we do not opine on either the IPO process or the IPO price. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 64

67 Regulatory Guide 111 provides guidance in relation to the content of independent expert s reports prepared for a range of transactions. Regulatory Guide 111 does not provide specific guidance on how an independent expert should analyse a transaction such as the implementation of the Proposed Capital Structure, but it does provide guidance on the form of analysis to be used when preparing an independent expert s report in relation to demutualisations. The implementation of the Proposed Capital Structure is not a demutualisation, and unlike some demutualisations, the implementation of the Proposed Capital Structure will not result in any change in the voting rights of Ordinary Shareholders or any change in control of MG. Nonetheless, we have had regard to this guidance, given that some of the considerations facing the Ordinary Shareholders are similar to those facing members in a proposed demutualisation. In particular, Regulatory Guide 111 notes that: in some situations, particularly in demutualisations, the issue of value may be of secondary importance to shareholders the expert should provide an opinion on whether the advantages of the transaction outweigh the disadvantages if the expert does not undertake a valuation, to the extent reasonably practicable, and where it can do so with sufficient precision to assist shareholders, the expert should quantify the advantages and disadvantages that it considers to be material if the expert concludes that the advantages of the transaction outweigh the disadvantages, the expert should say that the transaction is in the best interests of shareholders. As a dairy co-operative, the primary objectives of MG are to advance the interests of its supplier shareholders, through the acquisition and distribution of their milk, and the provision of other services which the Board may resolve as being in the interests of MG, and in the interests of and for the benefit of its supplier shareholders. As current suppliers of milk to MG, the Ordinary Shareholders have a financial interest in both the milk price paid to them as suppliers and the dividends paid to them as Ordinary Shareholders. If the implementation of the Proposed Capital Structure proceeds, the external investors who acquire Units through the IPO will have an interest solely in the level of distributions paid by MG, which are a function of, inter alia, the milk price paid to suppliers. As part of the Proposed Capital Structure, the Board has proposed a mechanism which facilitates the determination of the level of dividends/distributions which would be paid at any given milk price, such that a higher (lower) milk price will result in the allocation of a higher (lower) proportion of profit to dividends/distributions, with the aim of aligning the interests of the shareholder suppliers and Unitholders (the Profit Share Mechanism). From the perspective of the Ordinary Shareholders as a whole, assessing the fair market value of an ordinary share in MG is subjective, as it depends on the milk price to be paid to suppliers. Following the implementation of the Proposed Capital Structure, the level of dividends will be of greater interest to Ordinary Shareholders than historically due to the dilutionary impact of the distributions to Unitholders. To assess whether the Proposed Capital Structure is in the best interests of the Ordinary Shareholders as a whole, we have adopted the test of whether the advantages of the Proposed Capital Structure outweigh the disadvantages. Our evaluation includes consideration of the financial impact of the Proposed Capital Structure on both the potential level of dividends and future milk price to be paid to the Ordinary Shareholders, and the dilutionary impact of the IPO on the financial returns available to Ordinary Shareholders via future dividend payments. Definition of value To the extent that we have quantified the advantages and disadvantages of the Proposed Capital Structure, our analysis is based on the concept of fair market value, which we have defined as the amount at which an asset, liability or business would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our analysis has not been premised on the existence of a special purchaser. Summary of advantages and disadvantages We have formed our opinion as to whether the Proposed Capital Structure is in the best interests of Ordinary Shareholders as a whole based on an analysis of the likely advantages and disadvantages of the Proposed Capital Structure for Ordinary Shareholders as a whole. Page 2 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 65

68 ATTACHMENT 4 ORDINARY SHAREHOLDERS Details of the quantitative analysis we have performed in relation to the advantages and disadvantages of the Proposed Capital Structure are set out in Section 3. Advantages of the Proposed Capital Structure The Proposed Capital Structure will enable MG to fund the Growth Initiatives, which are required to enable MG to remain competitive MG has identified up to $600 million in growth initiatives which will collectively increase operational efficiency through investment in automation technology and exploit growth in Asian markets, by providing additional capacity and infrastructure for ultra high temperature milk (UHT), consumer cheese and nutritional products (the Growth Initiatives). The Proposed Capital Structure will enable MG to fund the Growth Initiatives. Key global competitors have already undertaken initiatives to take advantage of Asian market growth and improve operational efficiency. Key competitor initiatives include the following: Fonterra Co-operative Group (Fonterra) released announcements on 27 August 2014 outlining $555 million in capital expenditure to meet global demand by investing in three facilities with a combined processing capacity of 6.4 million litres per day Bega Cheese Limited (Bega) released announcements on 22 August 2014 detailing capital expenditure of $28 million in FY2014. This included investment in infant nutritional blending and canning, increased lactoferrin production expansion, new whey manufacturing capacity and increased cheddar cheese capacity Parmalat Australia Pty Ltd released announcements on 7 November 2014 noting capital expenditure of million for the nine months ended 30 September In Australia, Parmalat completed the installation of a UHT line to build on its South East Asian offering, whilst in North America it completed the expansion of butter, mozzarella and other cheese production assets Hope Dairies Limited, an unlisted Australian dairy processor, plans to invest approximately $500 million in farmland in Queensland and building a processing plant focused on powdered milk exports to China. Without improving operational efficiency and investing in expansion of production capacity to enable increased exports into Asian markets, MG risks falling behind competitors, achieving lower growth than competitors and sub-optimal returns. The Growth Initiatives are projected to provide a rate of return higher than Murray Goulburn s cost of capital We have calculated the internal rate of return of the projected future cash flows from the Growth Initiatives to be higher than MG s weighted average cost of capital. Accordingly, the Growth Initiatives are projected to be value accretive to MG. The Proposed Capital Structure is the best alternative to fund the Growth Initiatives As part of its review of MG s capital structure, the Board has considered various alternatives to the Proposed Capital Structure for funding the Growth Initiatives, including accessing debt markets, off balance sheet funding, full or partial divestment of certain operations and the retention of profits. Page 3 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 66

69 We set out the key advantages and disadvantages of the alternative funding options considered by the Board in the following table. Table 1: Key advantages and disadvantages of the alternative funding options Obtaining additional debt Advantages Ordinary Shareholders retain full control of the cooperative Allows MG to maintain its co-operative structure and philosophy Returns to Ordinary Shareholders are not diluted by returns to external equity investors The cost of debt is generally lower than the cost of equity Disadvantages Obtaining additional debt may increase the cost of debt as lenders require a greater return for the risk of lending to a highly geared company MG would not be able to draw down sufficient debt to fund the Growth Initiatives under its current financing arrangements, without breaching its existing debt covenants and the Board s target debt ratios Exposes MG to additional financial risk, compounding the additional operational risk inherent in undertaking the Growth Initiatives Alternatively, certain of the Growth Initiatives would need to be significantly delayed or foregone altogether to maintain MG s borrowing levels at a prudent level Off balance sheet funding (e.g. sale and lease back) Full listing of MG Listing of subsidiary (partial listing) Ordinary Shareholders retain full control of the cooperative Allows MG to maintain its co-operative structure and philosophy Returns to Ordinary Shareholders are not diluted by returns to external equity investors Allows financial risk to be maintained at a more prudent level Provides a market price and liquidity for the Ordinary Shares Potential to raise sufficient capital to fund the Growth Initiatives in full Provides access to additional equity funding in the future Allows financial risk to be maintained at a more prudent level Ordinary Shareholders retain full control of the unlisted subsidiaries Potential to raise sufficient capital (although may require the listing of core assets) Allows financial risk to be maintained at a more prudent level Limited opportunities exist within MG s portfolio of assets Unlikely to raise sufficient capital to fund the Growth Initiatives Requires MG to forego its co-operative structure and philosophy Potential for value shift away from milk pricing toward dividends or share price Ordinary Shareholders may lose full control of the co-operative Returns to Ordinary Shareholders are diluted by returns to external equity investors Transaction costs likely to be significant Ordinary Shareholders would likely lose control of the listed subsidiaries Capital raised from non-core operations may be insufficient to fund the Growth Initiatives Listing of core operations may require MG to forego its co-operative structure and philosophy Returns to Ordinary Shareholders are diluted by returns to external equity investors Potential for value shift away from milk pricing toward dividends or share price Complex transfer pricing mechanisms would be required between the listed and the unlisted subsidiaries Potential dis-synergies from separating the operations of the listed and the unlisted subsidiaries Transaction costs likely to be significant Retention of profits Ordinary Shareholders retain full control of the cooperative Allows MG to maintain its co-operative structure and philosophy Returns to Ordinary Shareholders are not diluted by external equity investors Allows financial risk to be maintained at a prudent level Source: MG, company announcements and Deloitte Corporate Finance analysis Note 1: This table is not intended to be exhaustive, but provides a summary of MG s key considerations Would require a reduction in dividends and/or milk price paid to Ordinary Shareholders It would take significantly longer to retain enough capital to proceed with the Growth Initiatives, and certain of the Growth Initiatives would be significantly delayed or foregone altogether On balance, we consider that the Proposed Capital Structure is the best alternative to funding the Growth Initiatives, given that it is the only alternative which adequately balances the following considerations: Page 4 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 67

70 ATTACHMENT 4 ORDINARY SHAREHOLDERS the need to raise sufficient capital to fund the Growth Initiatives in a timeframe that will allow MG to capture the growth opportunities currently available, recognising that its key competitors are also exploring similar growth opportunities. Failure to execute on the Growth Initiatives in the short to medium term may result in MG missing the opportunity to successfully capitalise on the increasing demand for dairy products from Asian markets the need to fund the Growth Initiatives, which are subject to significant operational risks as set out below, in a way which contains financial risk, and does not increase gearing levels above the Board s target debt ratios the desire to retain the co-operative structure and philosophy of MG, including the stated objective of maximizing the farm gate milk price (FMP) paid to the Ordinary Shareholders, and to maintain Ordinary Shareholders full control of the co-operative the desire to provide a market price and liquidity for the Ordinary Shares the desire to maintain the operations of MG as an integrated business, to take advantage of synergies between the operating units and diversification benefits. The Proposed Capital Structure will result in the Ordinary Shareholders having access to a market price and a liquid market for their Ordinary Shares Under the current arrangement, Ordinary Shareholders wanting to dispose of their Ordinary Shares are required to do so through a process facilitated by MG which matches transactions with farmers acquiring shares through the compulsory off-take of additional shares by suppliers in line with their level of annual milk production (Share Off-take). As described in MG s letter to suppliers in August 2014: If a shareholder retires or leaves MG, under the constitution there is no requirement for MG to repurchase the shares that the shareholder has accumulated. MG provides the retiring or leaving shareholder with the option to either transfer their shares to Preference Shares or, facilitates the sale of the shares to other MG suppliers through the share-off take process. All shares are illiquid and can only be bought and sold via this facilitated process. In a situation where supplier off-take was suspended, for example due to a prolonged downturn, then there may be no avenue for retiring or exiting farmers to get their $1.00 share value back. Under the Proposed Capital Structure, Units will be listed and publicly traded on the ASX. Given that the Units will have identical economic rights (with the exception of voting rights) as the shares, this will provide a market value for the shares. On the Shareholder Trading Platform, a market facilitator will match transactions on the online platform at prices set by trading in the Units. This mechanism will provide both a market price and additional liquidity. The Ordinary Shares are likely to trade at a higher price following the implementation of the Proposed Capital Structure Following the implementation of the Proposed Capital Structure, the Ordinary Shares should trade at a price in line with the trading price of the Units. The Board has stated that it reserves the right not to proceed with the IPO of the Unit Trust if it does not believe that the IPO price will be at a premium to the maximum price at which the Ordinary Shareholders owning fewer shares than the Share Standard 1 may acquire additional shares under the Supplier Share Offer 2. Based on the analysis set out in Section 3, we consider it likely that upon IPO of the Unit Trust, the Ordinary Shares will trade at a premium to both $1.00 per share, the current price at which the Ordinary Shares may be traded, and $1.24 per share, the maximum Supplier Share Offer price. Ordinary Shareholders with shareholdings above the Share Standard will be able to realise a gain over the short to medium term Following the implementation of the Proposed Capital Structure, Ordinary Shareholders may sell any Uncommitted Shares 3 over a three-year period, in line with the Three Year Sell Down Rule 4. Given that the 1 The Share Standard is set at one Ordinary Share per kilogram of milk solids (kgms) supplied 2 The Supplier Share Offer is the share entitlement offered to farmers who are below the Share Standard at a price between $1.00 and $1.24 per share (based on their tenure of supply) 3 Uncommitted Shares are defined as any Ordinary Shares owned in excess of the Share Standard which are not subject to a security interest in favour of MG or a third party Page 5 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 68

71 Ordinary Shares are likely to trade at a premium to $1.00 per share following the IPO, Ordinary Shareholders will realise a gain on the sale of any Uncommitted Shares. We note that Ordinary Shareholders may be taxed on any gain they make on the sale of Uncommitted Shares, and Ordinary Shareholders should seek independent advice regarding their individual circumstances in relation to the sale of Uncommitted Shares. Financial institutions have indicated they are likely to attribute value to shares in MG following the IPO of the Unit Trust, which may increase some Ordinary Shareholders borrowing capacity MG has consulted with the major institutions that provide financing to MG farmers. As the Proposed Capital Structure will provide a market price for the Ordinary Shares, the financial institutions have provided preliminary confirmation that they will attribute a market value to the Ordinary Shares in MG when considering lending to individual farming businesses in accordance with their standard asset lending ratios. Given the historical absence of an active and liquid market for ordinary shares in MG, banks have not previously considered the value attributable to ordinary shares when calculating asset lending ratios. This change will potentially provide additional borrowing capacity for some farmers, which may in turn encourage additional investment in dairy farming businesses. We note that this change will not alter financial institutions normal lending criteria in terms of debt servicing capacity, and is likely to be of most benefit to MG farmers whose ability to borrow has been constrained by asset lending ratios, as opposed to their ability to service ongoing debt repayments. The Proposed Capital Structure is projected to result in higher total payments to Ordinary Shareholders in the medium term 5 We have considered whether the total payments to Ordinary Shareholders, which consist of total milk payments and total dividends to Ordinary Shareholders, will be higher following the implementation of the Proposed Capital Structure than under the Status Quo scenario 6. As set out in Section 3, the Proposed Capital Structure is projected to result in higher total payments to Ordinary Shareholders in the medium term. The proceeds from the IPO will be used to fund the capital expenditures required to implement the Growth Initiatives, which will be incurred over the period to FY2018. The returns from the investment in the Growth Initiatives will start to benefit earnings from FY2016 onwards, through increased operational efficiencies, and higher volumes of higher margin products sold. The earnings from the Growth Initiatives are projected to continue to increase over time, with earnings from some of the capital expenditures only starting to be realised from FY2019 onwards. However, following the IPO, some of the returns from the Growth Initiatives will be used to fund distributions to Unitholders from FY2016 onwards. The net impact of these factors is that total payments to the Ordinary Shareholders are projected to be lower under the Proposed Capital Structure relative to the Status Quo scenario in the short to medium term. As a result, total payments to the Ordinary Shareholders are projected to be higher under the Proposed Capital Structure relative to the Status Quo scenario from the medium term onwards. We note that total payments to Ordinary Shareholders are highly dependent on future commodity prices. The Profit Share Mechanism has been set in order to limit the downside exposure of Ordinary Shareholders to lower commodity prices, and as a result, total payments to Ordinary Shareholders would be higher than under the Status Quo sooner at lower commodity prices than at higher commodity prices. 7 4 The Three Year Sell Down Rule states that at the implementation date of the Proposed Capital Structure, the shortest timeframe over which the Uncommitted Shares may be sold is three years and one day. Up to 25% of the Uncommitted Shares may be sold up to 30 June 2016; up to 50% of the Uncommitted Shares may be sold up to 30 June 2017; up to 75% of the Uncommitted Shares may be sold up to 30 June 2018; and from 1 July 2018, all of the Uncommitted Shares may be sold 5 The short term is defined as one to two years from the date of the IPO, the medium term as two to four years from the date of the IPO, and the long term as longer than four years from the date of the IPO 6 The Status Quo scenario assumes that there is no IPO or investment in the Growth Initiatives 7 This relationship holds true under the Profit Share Mechanism at milk prices between $4.00/kgms and $7.50/kgms Page 6 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 69

72 ATTACHMENT 4 ORDINARY SHAREHOLDERS The IPO of the Unit Trust will diversify MG s funding sources Currently MG s funding sources comprise equity from farmers as well as various debt facilities. Under the Proposed Capital Structure, MG will access additional funding from farmers (through farmers participating in the Supplier Share Offer) as well as from external equity investors through the IPO of the Units on the ASX. Diversifying MG s funding sources reduces its reliance on debt funding and gives MG the flexibility to access a variety of markets should the need arise, as well as providing it with the option to select the source of funding with the most favourable conditions, for example, additional equity in strong equity markets or further debt in favourable credit markets. Disadvantages of the Proposed Capital Structure Unitholders will participate in the returns generated by MG, and this is projected to result in lower total payments to Ordinary Shareholders in the short to medium term Under the Proposed Capital Structure the proceeds from the IPO will be used to fund the capital expenditures required to implement the Growth Initiatives, which will be incurred over the period to FY2018. The returns from the investment in the Growth Initiatives will start to benefit earnings from FY2016 onwards, through increased operational efficiencies, and higher volumes of higher margin products sold. However, following the IPO, some of the returns from the Growth Initiatives will be used to fund distributions to Unitholders from FY2016 onwards. The net impact of these factors is that total payments to the Ordinary Shareholders are projected to be lower under the Proposed Capital Structure relative to the Status Quo scenario in the short to medium term. The projected returns from the Growth Initaitives are subject to a number of risks The Growth Initiatives are large capital investment projects which involve the construction of new processing facilities, the sale of new products, entry into new markets for certain products, and the sale of increased volumes in existing markets. As for any capital investment project, there are risks of delays and cost overruns in the construction and/or commissioning of the new processing facilities. In addition, there is risk that the projected sales volumes and/or margins may not be achieved. These risks could manifest in lower returns to the Ordinary Shareholders than those projected by MG. We note that the projected returns are subject to risks of changes in the economic climate, commodity prices, economic growth rates and other market movements, and actual results are likely to differ from those projected as a result of these factors. In addition, the largest component of the Growth Initiatives relates to the production of nutritional products, including infant formula. As has been seen in the recent experience of Fonterra in relation to threats to its infant formula production, there is a high degree of reputational risk involved in the production of these products. Quality assurance processes must be of the highest standard, and any indication, actual or perceived, of a manufacturer not meeting these standards could result in returns from these products being adversely affected. Additional costs associated with the Unit Trust, the Shareholder Trading Platform and the Share Standard will be incurred Companies listed on the ASX are required to adhere to ASX listing rules, including continuous disclosure and financial reporting requirements, and incur fees and costs associated with complying with these requirements. The ongoing external costs associated with the Unit Trust, together with the costs of maintaining the Shareholder Trading Platform and the Share Standard have been estimated by MG to be approximately $3 million per annum. The Ordinary Shares will be subject to the price volatility of listed securities Following the IPO of the Unit Trust, the price of the Ordinary Shares will be linked to the market price of the Units. The market price of the Units will be subject to market volatility and changes as a result of, inter alia, the economic climate, industry sentiment, commodity prices, economic growth rates, and the future financial performance of MG. This may have negative implications for supplier shareholders, for example, if the market price of the Units falls below $1.00. In addition, if a supplier shareholder used the Ordinary Shares as collateral for borrowings from financial institutions and there was a decline in the market price of the Units, the supplier shareholder may be exposed to margin calls. There is a risk that suppliers may exit the co-operative in order to realise gains in the Ordinary Share price following the IPO of the Unit Trust Following the implementation of the Proposed Capital Structure, Ordinary Shareholders may sell any Uncommitted Shares held in excess of the Share Standard over a three-year period, in line with the Three Year Page 7 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 70

73 Sell Down Rule. Given that the Ordinary Shares are likely to trade at a premium to $1.00 per share following the IPO, Ordinary Shareholders will realise a gain on the sale of any Uncommitted Shares. It is also possible that some Ordinary Shareholders may decide to exit the co-operative in order to realise gains in the Ordinary Share price following the IPO of the Unit Trust. This could negatively affect both MG s milk supply, and the trading price of an Ordinary Share. In relation to the potential implications for MG s milk supply, we note that MG stated in the letter to suppliers on 3 March 2014: The potential increase in milk price being targeted combined with an injection of balance sheet strength into MG farm businesses should provide confidence to supplier/shareholders and be expansionary for milk supply, countering any short term profit taking. In relation to the trading price of an Ordinary Share, we note that the Three Year Sell Down Rule will limit the volume of Ordinary Shares which can be sold under these circumstances. Ordinary Shareholders with shareholdings significantly below the Share Standard at the date of the IPO may not be better off if the Proposed Capital Structure proceeds Relative to the Status Quo scenario, dividend payments are projected to be higher under the Proposed Capital Structure, and accordingly the incremental returns from the Growth Initiatives are expected to benefit those with shareholdings above the Share Standard to a greater extent than those with shareholdings at or below the Share Standard. We note that total payments to Ordinary Shareholders are highly dependent on future commodity prices. Our analysis suggests that to receive higher payments under the Proposed Capital Structure than under the Status Quo scenario may take longer for Ordinary Shareholders with shareholdings significantly below the Share Standard at the date of the IPO compared to Ordinary Shareholders at the Share Standard, with the length of time increasing the further the Ordinary Shareholder is below the Share Standard. However, the Profit Share Mechanism has been set in order to limit the downside exposure of Ordinary Shareholders to lower commodity prices, and as a result, at lower commodity prices this delay would be reduced. 8 We note that Ordinary Shareholders holding fewer Ordinary Shares than the Share Standard have the opportunity to acquire additional shares up to the Share Standard prior to the IPO, through the Supplier Share Offer, at a price of between $1.00 and $1.24 per share (depending on their tenure of supply), representing a discount to the likely IPO price of the Units, and therefore may realise a gain in the short term (subject to trading restrictions). As a result of the above, Ordinary Shareholders who participate in the Supplier Share Offer to bring their shareholding up to the Share Standard prior to the date of the IPO are likely to be better off in terms of sharing in the benefits of the Proposed Capital Structure than those with shareholdings significantly below the Share Standard at the date of the IPO. Ordinary Shareholders should seek independent advice regarding their individual circumstances in relation to the Supplier Share Offer. The Unit price may not reflect the underlying value of a Share All other things being equal, the value of a security with voting rights is higher than the value of a security without voting rights. Most Ordinary Shares will have voting rights attached to them, whereas the Units will not have any voting rights attached. The Shareholder Trading Platform and independent market facilitator will facilitate trading of the Units and the Ordinary Shares at the same price. Consequently, the trading price of the Ordinary Shares following the IPO is unlikely to reflect the value of the voting rights attaching to Ordinary Shares. Nonetheless, as noted above, following the IPO, the Ordinary Shares are likely to trade at a premium to the current price at which they can be traded of $1.00 per Ordinary Share. Other matters In arriving at our opinion, we have also taken into account the following additional considerations for the Ordinary Shareholders as a whole. The Proposed Capital Structure will not result in any change in control The transaction has been structured in such a way that MG retains its co-operative status whereby full control is maintained by the famers. This is achieved through all voting rights attaching to ordinary shares being held by 8 This relationship holds true under the Profit Share Mechanism at milk prices between $4.50/kgms and $7.00/kgms Page 8 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 71

74 ATTACHMENT 4 ORDINARY SHAREHOLDERS current suppliers (i.e. not to be confused with non-voting ordinary shares). Whilst dividend distributions will now be shared with a wider group of investors, including external unitholders in the ASX listed unit trust, all voting rights will be retained by active suppliers. The Profit Share Mechanism is subject to change at the discretion of the Board although with a requirement to obtain an independent expert s report and the unanimous approval of special directors. 9 Following the Proposed Capital Structure, the Board will have the discretion to change the Profit Share Mechanism in special circumstances. Future changes to the Profit Share Mechanism could be made to redistribute profits in favour of either the Unitholders or the Ordinary Shareholders. We have undertaken sensitivity analysis to quantify the impact of changes in the Profit Share Mechanism on total payments to Ordinary Shareholders. Any increase in the percentage of the Milk Pool 10 attributed to net profit after tax would decrease the total payments to Ordinary Shareholders under the Proposed Capital Structure, and any decrease in the percentage of the Milk Pool attributed to net profit after tax would increase the total payments to Ordinary Shareholders under the Proposed Capital Structure. In considering future changes to the Profit Share Mechanism, the Board will need to consider the interests of both the Unitholders and the Ordinary Shareholders. Given that MG s earnings depend on maintaining a stable base of supplier shareholders to provide milk to MG, it is in the best interests of MG, the Ordinary Shareholders and the Unitholders to maintain a high enough milk price to incentivise supplier shareholders to remain in the co-operative. This limits the extent to which it would be rational for the Board to change the Profit Share Mechanism to allocate more of the Milk Pool to dividends/distributions at the expense of the milk price. Further discussion of the Profit Share Mechanism and potential situations in which it could be changed are set out in Section 1.3. The Proposed Capital Structure will not result in any significant tax or accounting implications MG has obtained tax and accounting advice and to date is not aware of any material tax or accounting consequence related to the Proposed Capital Structure for MG and Ordinary Shareholders. We note that this tax and accounting advice was general in nature, and Ordinary Shareholders should seek independent advice from financial and/or tax advisers to consider the implications of the Proposed Capital Structure given their individual situation. Ordinary Shareholders should refer to Section 5 of the Capital Structure Booklet for further discussion of the tax implications of the Proposed Capital Structure. We note that should the Proposed Capital Structure be approved, MG will continue to operate in line with the cooperative principles which underpins its constitution. Currently MG has access to certain elements of the Income Tax Assessment Act 1936 that apply to co-operatives that allows it to claim tax deductions for unfranked dividends. In the future, as a result of continued growth in its business, MG expects that it may no longer have the ability to claim a tax deduction for unfranked dividends. As a consequence MG will pay more tax at the corporate level, however, Ordinary Shareholders will receive franked dividends, and therefore benefit from franking credits. MG expects that this will have no impact on total return to Ordinary Shareholders. We note that only Australian tax resident entities are able to utilize franking credits attached to franked dividends. Opinion In our opinion the advantages of the Proposed Capital Structure outweigh the disadvantages of the Proposed Capital Structure and therefore the Proposed Capital Structure is in the best interests of Ordinary Shareholders as a whole. While in the short to medium term, the Proposed Capital Structure is projected to result in lower total payments to Ordinary Shareholders than under the Status Quo, in the longer term, total payments to Ordinary Shareholders are projected to be higher under the Proposed Capital Structure. As a greater proportion of the total payments made to Ordinary Shareholders following implementation of the Proposed Capital Structure will be in the form of dividend payments, Ordinary Shareholders with shareholdings above the Share Standard will benefit from higher total payments under the Proposed Capital Structure sooner than Ordinary Shareholders with shareholdings below the Share Standard. Ordinary Shareholders with shareholdings currently below the Share 9 A special director is any person appointed by the Board. The maximum number of special directors at any one time is three 10 Milk Pool is defined as revenue less expenses, excluding milk payments and tax Page 9 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 72

75 Standard will have the opportunity to acquire shares up to the Share Standard under the Supplier Share Offer such that their shareholdings would not be below the Share Standard at the time of the IPO. Following the implementation of the Proposed Capital Structure, the Ordinary Shares are likely to trade at a premium to the current price at which the Ordinary Shares can be traded of $1.00 per Ordinary Share, and to the maximum price at which the Supplier Share Offer will take place of $1.24 per Ordinary Share. Ordinary Shareholders whose shareholdings are in excess of the Share Standard will be able to realise this price gain on any Uncommitted Shares held in excess of the Share Standard over a three-year period, in line with the Three Year Sell Down Rule. The majority of Ordinary Shareholders currently have shareholdings above the Share Standard, and will therefore be able to realise some gain on the sale of Ordinary Shares in the short to medium term as a result of the implementation of the Proposed Capital Structure. Ordinary Shareholders who intend to remain a supplier of MG must maintain their shareholdings at the Share Standard. Accordingly, Ordinary Shareholders who intend to remain a supplier of MG and whose shareholdings are at or below the Share Standard would not be able to realise any gain on the sale of Ordinary Shares until retiring or exiting the co-operative. An individual Ordinary Shareholder s decision in relation to the Proposed Capital Structure may be influenced by his or her particular circumstances. If in doubt the Ordinary Shareholder should consult an independent adviser, who should have regard to their individual circumstances. This opinion should be read in conjunction with our detailed report which sets out our scope and findings. Yours faithfully Stephen Reid Rachel Foley-Lewis Authorised Representative Authorised Representative AR number: AR number: Page 10 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 73

76 ATTACHMENT 4 ORDINARY SHAREHOLDERS Glossary Reference Definition ABARES AFSL AGM AR ASIC ASX Bega Board Business Plan CAGR Canadean Capital Structure Booklet CPI Dairy Australia Deloitte Corporate Finance Directors Draft Capital Structure Booklet DSAP EBIT EBITDA FAO FMP Fonterra FOS FSG FY20xx GDT Growth Initiatives Hard Cap IBIS IPO Kgms MG Milk Pool Model NPAT NSW OECD Ordinary Shareholders P/E Preference Share Conversion Preference Shares Australian Bureau of Resources, Economics and Sciences Australian Financial Services Licence Annual General Meeting Authorised Representative Australian Securities and Investments Commission Australian Securities Exchange Bega Cheese Limited The board of directors of MG The internal 5-year business plan for MG Compound Annual Growth Rate Canadean Company Analysis Booklet to accompany a Notice of Meeting for the extraordinary general meeting containing the detailed terms of the Proposed Capital Structure Consumer Price Index Dairy Australia Limited Deloitte Corporate Finance Pty Limited The Directors of MG A copy of the draft Capital Structure Booklet Dairy Structural Adjustment Program Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation Food and Agriculture Organization Farm gate milk price Fonterra Co-operative Group Financial Ombudsman Service Financial Services Guide Financial year ended 30 June 20xx Global Dairy Trade Capital expenditure projects totalling up to $600 million, aimed at investments in manufacturing capacity, market reach and operational efficiencies with the objective of increasing the FMP paid to its suppliers Hard cap on ownership of 0.5% of the total outstanding shares on issue IBIS World Pty Ltd Initial Public Offering Kilograms of milk solids Murray Goulburn Co-operative Co. Limited Revenue less expenses, excluding milk payments and tax The financial model detailing the financial performance projections and cash flow projections, including farmgate milk prices and distributions paid to Ordinary Shareholders and Unitholders, up to and including the financial year ending FY2020 Net profit after tax New South Wales Organisation for Economic Co-operation and Development Holders of ordinary shares in MG Price / earnings The conversion of the Preference Shares into non-voting ordinary shares at a ratio of $1.25 to the IPO price for the Units B-class and C-class preference shares Page 11 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 74

77 Reference Definition Profit Share Mechanism Proposed Capital Structure QLD SA Share Off-take Share Standard Shareholder Trading Platform SMP Soft Cap Status Quo Supplier Share Offer TAS Three Year Sell Down Rule UHT Uncommitted Shares Unit Trust Unitholders Units VIC WA WCB WMP Mechanism which facilitates the determination of the level of dividends/distributions which would be paid at any given milk price, such that a higher (lower) milk price will result in a higher (lower) dividend/distribution, with the aim of aligning the interests of the shareholder suppliers and Unitholders The capital restructure currently being considered by MG, which would include raising up to $500 million from the Unitholders via an IPO of the Units to be issued by the Unit Trust listed on the ASX Queensland South Australia Compulsory off-take of additional shares by supplier shareholders, in line with their level of annual milk production, up to the Share Standard for suppliers whose shareholding is below the Share Standard. For suppliers whose shareholding is above the Share Standard off-take will be optional Share standard is set at one share per kgms supplied The facilitated trading platform where shareholders will trade their Ordinary Shares under the Proposed Capital Structure Skim milk powder Soft cap on voting rights of ordinary shareholders, of one vote per five litres of milk supplied The scenario that assumes there is no IPO or investment in the Growth Initiatives The share entitlement offered to farmers who are below the Share Standard at a price between $1.00 and $1.24 per share (based on their tenure of supply) Tasmania The shortest timeframe over which the Uncommitted Shares may be sold is three years and one day. Up to 25% of the Uncommitted Shares may be sold up to 30 June 2016; up to 50% of the Uncommitted Shares may be sold up to 30 June 2017; up to 75% of the Uncommitted Shares may be sold up to 30 June 2018; and from 1 July 2018, all of the Uncommitted Shares may be sold Ultra high temperature milk Any Ordinary Shares owned in excess of the Share Standard which are not subject to a security interest in favour of MG or a third party The unit trust to be listed on the ASX via the IPO The holders of Units in the Unit Trust The units to be issued by the Unit Trust Victoria Western Australia Warrnambool Cheese & Butter Factory Company Holdings Limited Whole milk powder Page 12 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 75

78 ATTACHMENT 4 ORDINARY SHAREHOLDERS Contents 1 Overview of the Proposed Capital Structure 14 2 Profile of MG 19 3 Quantitative analysis of the Proposed Capital Structure 29 Appendix A: Context to the report 33 Appendix B: Valuation methodologies 35 Appendix C: Dairy industry 36 Appendix D: Comparable entities 44 Page 13 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 76

79 1 Overview of the Proposed Capital Structure 1.1 Overview of the current structure Murray Goulburn Co-operative Co. Limited (MG) is a dairy co-operative, owned by over 2,500 dairy farmers. An overview of MG is provided in Section 2, and an overview of the Australian and global dairy industry within which it operates is provided in Appendix C. The Proposed Capital Structure will result in some changes to the rights of Ordinary Shareholders of MG. We have summarised below some of the existing features of shareholdings in the co-operative: upon joining the co-operative as a supplier, dairy farmers are required to acquire an initial interest of 500 shares at a price of $1.00 per share. Dairy farmers are then required to participate in a compulsory offtake of additional shares, in line with their level of annual milk production (the Share Off-take) in addition to receiving payments from MG for the supply of milk, as shareholders of the co-operative dairy farmers are entitled to any dividends that may be declared by the Board only active dairy farmers currently supplying milk to MG may own ordinary shares with voting rights attached. The voting rights of ordinary shareholders are subject to a soft cap of one vote per five litres of milk supplied (based on the last 12 months supply) (the Soft Cap) the shares of former ordinary shareholders who no longer supply milk to MG are converted into B-class and C-class preference shares (the Preference Shares). 11 In anticipation of the Proposed Capital Structure, MG undertook a voluntary buyback of the Preference Shares in early 2015 in order to further simplify the capital structure of MG. 1.2 The Proposed Capital Structure In August 2013, MG announced a review of its capital structure, with the intention of exploring options to fund capital expenditure projects aimed at investments in manufacturing capacity, market reach and operational efficiencies with the objective of increasing the farm-gate milk price (FMP) paid to its suppliers (the Growth Initiatives). As part of this review, the board of Directors (Board) considered various funding alternatives, including accessing debt markets, off-balance sheet funding, full or partial divestment of certain operations, the retention of profits, and raising equity from existing shareholders and/or external investors. Following this review, and after four rounds of consultation with shareholders and other stakeholders ending in early 2015, MG announced that, subject to approval by the ordinary shareholders of MG (Ordinary Shareholders), it would proceed with the Proposed Capital Structure. The key features of the Proposed Capital Structure are as follows: up to approximately $500 million will be raised from existing supplier shareholders and external investors via an IPO of the Units to be issued by a unit trust (the Unit Trust), which will be a special purpose passive funding vehicle established by MG and listed on the ASX the unitholders in the Unit Trust (Unitholders) will be entitled to receive the same distribution as the dividend received by Ordinary Shareholders, however the Units will have no voting rights in relation to MG, and accordingly 100% of the voting rights in MG will be retained by the Ordinary Shareholders a share standard will be established for supplier shareholders, requiring dairy farmers to participate in the Share Off-take until they own one share per one kilogram of milk solids (kgms) supplied 12 (the Share 11 The shareholdings of farmers who, at the time that they ceased supplying MG, held more than 10,000 shares, had supplied for more than 10 years and ceased supplying MG due to retirement, are converted to C-class preference shares. The shareholdings of farmers who ceased supplying MG due to retirement or in order to supply another company, held less than 10,000 shares or supplied MG for less than 10 years, are converted to B-class preference shares. 12 For the purpose of calculating the Share Standard, the volume of milk solids supplied will be measured as a three year average (tested annually at 30 June). Page 14 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 77

80 ATTACHMENT 4 ORDINARY SHAREHOLDERS Standard). The Share Off-take will be optional for supplier shareholders who own Ordinary Shares in excess of the Share Standard in conjunction with initial public offering (IPO) process, existing suppliers will be offered the opportunity to purchase additional shares (the Supplier Share Offer). Suppliers holding fewer Ordinary Shares than the Share Standard will be entitled to purchase additional Ordinary Shares at a price of between $1.00 and $1.24 (depending on the tenure of their supply as displayed in the figure below) and suppliers holding more Ordinary Shares than the Share Standard may also purchase additional Ordinary Shares at the IPO price of the Units, up to the Hard Cap Figure 1: Purchase price of additional shares under the Supplier Share Offer Offer price ($/share) < Years of supply Source: MG suppliers are not obliged to participate in the Supplier Share Offer, however, the price of any Ordinary Shares acquired after the completion of the implementation of the Proposed Capital Structure, including through the Share Off-take, will be determined by market trading in the Units, as opposed to the current price determined by the Board of $1.00 per Ordinary Share farmers who do not currently supply milk to MG will also be able to participate in the Supplier Share Offer, subject to them entering into a supply contract with MG at the implementation date of the Proposed Capital Structure, suppliers will have the right to sell any Ordinary Shares owned in excess of the Share Standard which are not subject to a security interest in favour of MG or a third party (the Uncommitted Shares). The Uncommitted Shares may be sold subject to the following (the Three Year Sell Down Rule): o the shortest timeframe over which the Uncommitted Shares may be sold is three years and one day o up to 25% of the Uncommitted Shares may be sold up to 30 June 2016 o up to 50% of the Uncommitted Shares may be sold up to 30 June 2017 o up to 75% of the Uncommitted Shares may be sold up to 30 June 2018 o from 1 July 2018, all of the Uncommitted Shares may be sold the Board will implement a Profit Share Mechanism, which will determine the level of dividends to be paid to Ordinary Shareholders and distributions to be paid to Unitholders based on the FMP paid to suppliers by MG (the Profit Share Mechanism). The Board intends the Profit Share Mechanism to be a mechanism to align the interests of the supplier shareholders and the Unitholders, such that higher dividends/distributions are paid in times when higher FMPs are paid, and lower dividends/distributions are paid in times when lower FMPs are paid. The Profit Share Mechanism is explained further in Section 1.3 below a Shareholder Trading Platform including an independent market facilitator will be created to facilitate the trading of the Ordinary Shares and the Units, including entering into rebalancing transactions to ensure that it maintains a neutral exposure to MG. The rebalancing transactions will not change the aggregate number of Ordinary Shares and Units on issue the Board has also proposed to convert the Preference Shares into non-voting ordinary shares at a ratio of $1.25 to the IPO price for the Units (the Preference Share Conversion). The ordinary shares to be issued as Page 15 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 78

81 part of the Preference Share Conversion will receive the same dividend distribution as the Ordinary Shares, but will have no voting rights. Other key changes which would result from the Proposed Capital Structure are summarised in the following table. Table 2: Key changes to the Share Standard Current structure Proposed Capital Structure Key unit of measurement Litres of milk Kilograms of milk solids New entrants Must acquire 500 shares at $1.00 each Participation in the Share Off-take Voting rights Share ownership Compulsory at a rate of 0.65 cents worth of shares per litre of milk supplied, up to the Hard Cap Restricted to the Soft Cap of one vote for every five litres of milk supplied p.a. Restricted to the Hard Cap of 0.5% of the total shares (including preference shares) Must acquire 500 shares at the market price of the Units at the time of entry Compulsory below the Share Standard at a minimum rate of 9 cents per kgms supplied. Suppliers can also elect to participate at a higher rate of 13 cents or 27 cents per kgms p.a. 13 Optional if the farmer is above the Share Standard at a rate of 9 cents, 13 cents or 27 cents per kgms p.a. Restricted to the Share Standard of one vote per kgms supplied (measured as a 3-year rolling average) Restricted to the Hard Cap of 0.5% of the total shares (including preference shares) Source: MG The structure (simplified) post the Proposed Capital Structure is presented below. Figure 2: Structure (simplified) post the implementation of the Proposed Capital Structure Murray Goulburn Responsible entity Shareholders Shareholder Trading Platform and market facilitator Murray Goulburn Trust Unitholders Source: MG As shown in the diagram above, the Unit Trust will be a separate legal structure, and will be managed by a responsible entity which will be a wholly-owned subsidiary of Murray Goulburn. The responsible entity will hold an Australian Financial Services Licence (AFSL) to administer the Unit Trust, and the Unit Trust will be a managed investment scheme and registered under the Corporations Act. The rationale and key benefits of the Proposed Capital Structure identified by the Board include: potential to increase the FMP that MG pays to suppliers by providing funding for investment in major equipment facility upgrades and providing the flexibility to pursue other opportunities when they arise provides cost effective access to capital markets enables MG to increase its competitiveness vis-a-vis other dairy processors 13 After the implementation of the Proposed Capital Structure the Share Off-take will be measured in kgms, as opposed to litres of milk supplied. 9 cents, 13 cents and 27 cents per kgms is equivalent to 0.65 cents, 1.00 cents and 2.00 cents per litre of milk, respectively. Page 16 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 79

82 ATTACHMENT 4 ORDINARY SHAREHOLDERS equity funding will strengthen MG s balance sheet and reduce reliance on debt funding farmers will retain 100% voting rights in MG provides a market value of MG shares. For farmers, this means that they will be able to recognise the market value of their shares in their financial statements, thereby strengthening their balance sheet, as well as providing a mechanism enabling banks to recognise the market value of ordinary shares for funding purposes. This may encourage reinvestment in the dairy farming industry. The key risks identified by management of MG include: to the extent that the market price of the Units, and therefore the ordinary shares, is higher than the current price of $1.00 per share, there is the risk that farmers may wish to realise some or all of their shareholding (by ceasing supply in order to sell shares) market forces will determine the price of the Units, and therefore the price of ordinary shares, and this will potentially introduce an element of price volatility, as opposed to the current fixed price per share at which the shares have historically traded. 1.3 Profit Share Mechanism The Profit Share Mechanism is a distribution mechanism that aims to align the interests of the supplier shareholders and Unitholders by paying a higher distribution/dividend to Unitholders and Ordinary Shareholders when the FMP is higher, and a lower distribution/dividend to Unitholders and Ordinary Shareholders when the FMP is lower. The Profit Share Mechanism is subject to adjustments for the following: inflation (annually based on 50% of the consumer price index) special circumstances as determined by the Board. As shown in the figure below, the Profit Share Mechanism will determine the distribution of the Milk Pool 14 between milk payments, tax and net profit after tax, to be allocated between Ordinary Shareholders, Unitholders and retained earnings. While dividends/distributions are at the discretion of the Board, MG intends to distribute 100% of net profit after tax (NPAT) to Ordinary Shareholders and Unitholders by way of dividends and distributions. In certain circumstances MG will have the ability to depart from the Profit Share Mechanism allocation ranges in order to retain capital from the Milk Pool, up to a maximum amount of 3% of the Milk Pool in a financial year. The Profit Share Mechanism would then be applied to the adjusted Milk Pool, that is, after deducting the retained amount. Refer to section of the Capital Structure Booklet for further details on deviations from the Profit Share Mechanism. Figure 3: Profit Sharing Mechanism process Milk payments Suppliers / Shareholders Revenue Expenses Profit - (excl. milk = Milk Pool Sharing Tax payments) Mechanism Dividends / distributions Unitholders NPAT Retained earnings Source: MG 14 The Milk Pool is defined as revenue less expenses, excluding milk payments and tax Page 17 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 80

83 The following table summarises the allocation of the Milk Pool under the Profit Sharing Mechanism. Table 3: Allocation of Milk Pool under Profit Sharing Mechanism Percentage of Milk Pool allocated to dividends, distributions and FMP range (Southern Region) retained earnings Percentage of Milk Pool allocated to milk payments and tax FMP<$ % 96.5% $5.00 FMP< $ % - 4.5% 95.5% % $5.50 FMP< $ % - 5.5% 94.5% % $6.00 FMP< $ % 6.5% 93.5% % $6.50 FMP< $ % - 7.5% 92.5% % FMP $ % 92.5% Source: MG 1.4 Key conditions of the Proposed Capital Structure The Proposed Capital Structure is subject to various conditions, the most significant being: shareholder approval of the Proposed Capital Structure by 50% of present and voting shareholders at the extraordinary general meeting shareholder approval of certain constitutional amendments by 75% of present and voting shareholders at the EGM, including approving of the implementation of the Share Standard. The constitutional amendments are not critical to the Proposed Capital Structure proceeding the relevant approvals from the Australian Securities and Investment Commission (ASIC) and the ASX approval of the Proposed Capital Structure from MG s lenders granting of the requested rulings from the Australian Taxation Office. 1.5 Intentions if the Proposed Capital Structure proceeds If the Proposed Capital Structure proceeds, MG will be able to fund the Growth Initiatives. Management has identified up to $600 million of capital projects to be undertaken over a period of three to five years relating to dairy foods manufacturing and supply chain infrastructure that will connect MG to Asian growth markets. This includes investment in technology and automation aimed at improving operational efficiency. The initiatives aim to increase the output of higher margin products, in particular, nutritional powders, consumer cheese and dairy beverages. For additional details in relation to the Growth Initiatives, refer to Section 2.5. Should the Proposed Capital Structure not proceed, the Board has stated that the Growth Initiatives would not proceed as currently envisaged. It is possible that some of the Growth Initiatives could be funded through debt markets, however, it is likely that some or all of the Growth Initiatives would need to be deferred or may be foregone altogether. Page 18 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 81

84 ATTACHMENT 4 ORDINARY SHAREHOLDERS 2 Profile of MG 2.1 Overview of operations MG is a co-operative, 100% controlled by dairy farmers, with over 2,500 supplier shareholders. An overview of the Australian and global dairy industry within which MG operates is provided in Appendix C. As a dairy co-operative, the primary objectives of MG are to advance the interests of its supplier shareholders, through the acquisition and distribution of supplier shareholder milk and the provision of other services which the Board may consider as being in the interests of MG and its suppliers. The company opened its first co-operative factory in Following this, MG continued to acquire farming operations domestically, before expanding internationally through the acquisition of an interest in its first processing facility in Qingdao in Today, MG is Australia s largest dairy foods company, producing a range of ingredient and nutritional products, supplying the food service industries globally and selling consumer products nationally under the flagship Devondale brand. MG s products are sold in over 30 countries globally. For the year ended 30 June 2014, MG produced 3.4 billion litres of milk and accounted for approximately 37% of Australia s milk production by volume. The following table summarises the key statistics of MG s operations for the year ended 30 June Table 4: Operational summary of MG Key metrics for the year ended 30 June 2014 Units Details Annual milk volume 1 Billion litres 3.4 Annual production of dairy products Tonnes 784,299 Final available farm-gate price (as at 30 June 2014) Per kg of milk solids $6.81 Source: Deloitte Corporate Finance analysis Note: 1. Includes MG s majority owned subsidiary, Tasmanian Dairy Products Company Limited For the year ended 30 June 2014, approximately 77% of MG s export revenue was generated in Asia, as shown in Figure 4 below. Approximately 51% of MG s milk production was exported during the year ended 30 June 2014, predominantly to Asia. Figure 4: Total revenue by market Figure 5: Export revenue by market 4% 12% 51% 49% 7% 77% International Australia Asia Middle East/Africa Americas Other Source: Deloitte Corporate Finance analysis Source: Deloitte Corporate Finance analysis Page 19 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 82

85 2.2 Company history An overview of the recent history of MG is provided in Figure 6 below. Figure 6: MG s company history 2006 Acquired the Classic Foods business at Edith Creek in Tasmania in May Opened MG Qingdao factory in China in May through a 51% interest in a joint venture with a Chinese partner Reported significant growth in profit after tax to $93.2 million from $21.7 million for FY2008 (which was affected by the global financial crisis), boosted by strong export prices 2009 Entered into a joint venture with fresh food company Danone in July to market yoghurt Entered negotiations to acquire Warrnambool Cheese & Butter Factory (WCB) for approximately $160 million in January. MG acquired 4 million shares in WCB for $15.0 million Closed Leitchville cheese site in February, after eight years of drought in the region Announced that MG had withdrawn its takeover for WCB in June Announced $100 million in cost savings through redundancies affecting both processing and head office staff Announced a 76.0% interest in the Tasmanian Dairy Products joint venture in June Acquired the joint venture partner s 49.0% interest in MG Qingdao increasing MG s ownership to 100% in March Acquired an additional 2.3% stake in WCB for AUD 5.7 million in cash in April increasing MG s share to 14.5% of WCB Announced that it will build two new milk processing facilities in Sydney and Melbourne in July WCB acquired by Saputo in February 2014, resulting in MG selling its 17.7% interest in WCB Announced that MG is considering a partial public listing as a means of raising capital in November Announced three new capital projects worth a combined $126 million ($74 million, $38 million and $14 million in cheese, infant nutrition and dairy beverages, respectively) in May Announced a record high available milk price for FY2014 of $6.81 per kgms 2014 Mandatory buyback of 100% of A-class preference shares completed Voluntary buyback of 49.84% and 59.62% of B-class and C-class preference shares, respectively. This was completed in January 2015 Source: MG Announcements, Deloitte Corporate Finance analysis, ASX announcements, CapitalIQ 2.3 Shareholding structure As a co-operative, MG is owned solely by dairy farmers who either currently supply milk, or formerly supplied milk, to the co-operative. Over the past year, MG has undertaken a simplification of its shareholding structure and has facilitated the following share buybacks to date: the selective capital reduction and cancellation of all A-class preference shares for $1.25 per share completed in June 2014 for a total of $18.5 million the buyback of 49.84% B-class preference shares and 59.62% C-class preference shares on issue for $1.25 per share at a total cost of $34.9 million Page 20 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 83

86 ATTACHMENT 4 ORDINARY SHAREHOLDERS Following the completion of these share transactions there are now three classes of shares outstanding, as shown in the following table. Table 5: MG s shareholder classes Term Ordinary shares B-class Preference Shares C-class Preference Shares Description Ordinary shares Non-cumulative, nonredeemable preference share Type of shareholders Existing suppliers Retired farmers who supplied MG for less than 10 years or had less than 10,000 shares. Alternatively, shareholders who left MG to go to another processor Non-cumulative, nonredeemable preference share Retired farmers who supplied MG for greater than 10 years and had greater than 10,000 shares and did not leave MG to supply milk to another processor Number of shareholders 2, Average shareholding 99,846 15,619 41,250 Shares outstanding 282 million 8 million 17 million Percentage of total shareholding 91.9% 2.5% 5.6% Voting rights (at AGM) Yes No No Dividend ranking Below preference shares Senior to ordinary shares but equal to C class shares Senior to ordinary shares but equal to B class shares Dividend At the discretion of the Board At the discretion of the Board At the discretion of the Board Franking credits Dividend generally not franked Dividend generally not franked Dividend generally not franked Pro-rata share of surplus 2 Yes Yes Yes Winding up The right to participate in the distribution of surplus assets in any liquidation of MG. This right is subordinate to the rights of preference shareholders. The right to repayment of $1 per share upon any liquidation of MG. The right to repayment is senior to ordinary shares and equal to C-class preference shares. The right to repayment of $1 per share upon any liquidation of MG. The right to repayment is senior to ordinary shares and equal to B-class preference shares. Source: Management Note: 1. Figures may not add due to rounding 2. These shares carry a right to a pro-rata share of any surplus earnings determined by the Board in accordance with the Constitution 3. Ordinary Shares may be converted into non-voting shares (and vice versa) by the Board in certain circumstances. 2.4 Products MG has three main operating segments, being Ingredients and Nutritionals, Dairy Foods, and Other, which includes MG Trading and MG s other joint ventures and subsidiaries. Each of these are described briefly below Ingredients and Nutritionals The Ingredients and Nutritionals segment supplies a wide range of ingredients to consumers both domestically and internationally. The products produced by this segment include milk powders, whey powders, cheese products, lactose, anhydrous milk fats, specialty milk fats, speciality milk proteins, caseinates, bioactives including lactoferrin, natural milk minerals and nutritional products, including infant formula Dairy Foods This segment includes retail brands marketed by MG or manufactured under contract packaging arrangements with major retailers, food service wholesalers or other food manufacturers both domestically and internationally. The brands in this channel include: Devondale: the only brand sold in Australia that offers a full suite of dairy products, including milk (daily pasteurised and long life milk), spreads and cheese. Devondale is marketed both in Australia and overseas Liddells: lactose free cow s milk brand, including long-life milk, long-life cream and yoghurt Table Cove: a milk brand which produces full cream, skim and reduced fat milk in south eastern Australia Ascend: a sports protein brand which includes products containing unique bioactive proteins Page 21 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 84

87 Kiewa Country: produces modified and flavoured milk for the Victorian alpine regions Cobram: produces a large range of cheese (bulk and retail), whey powder, whey protein concentrate, whey protein isolate, lactose, specialty whey proteins, infant formula and specialty ingredients Proform: meal replacement and supplement based on milk powder MG is a large supplier in the supermarket segment, and has developed its market position through long -term retail relationships Other MG Trading The MG Trading segment provides its milk suppliers and other rural customers with farm inputs and services. MG Trading operates 25 stores and five fertiliser depots servicing most of south-east Australia. MG Trading stocks a wide range of farm inputs including fodder, feed, fertiliser, farm chemicals, animal health products, dairy hygiene products and work and safety wear. MG Qingdao MG operates in China through MG Qingdao Dairy which was established as a joint venture with a local partner in MG Qingdao produces a range of infant nutrition products under the Natrastart brand which are marketed and distributed throughout China. MG acquired the 49.0% interest in MG Qingdao that it did not already own in March 2013 and it now operates as a wholly owned subsidiary of MG. Joint ventures MG has diversified its operations through joint ventures. MG currently participates in the joint ventures set out in the following table. Table 6: MG s joint ventures Joint venture Operations overview Markets Interest Danone Murray Goulburn Dairy Technical Services Food Laboratories Tasmanian Dairy Products Source: MG Markets yoghurt and other fresh dairy products Provides independent analytical services to meet food safety needs Dairy processing which produces high quality milk powders and dairy fat products Australia 50.0% Australia 25.3% Australia 76.0% 2.5 Growth initatives MG intends to invest up to $600 million over the next five years on the Growth Initiatives, with the aim of connecting MG to key Asian growth markets, which the Board believes will enable MG to sell higher value-add products and increase the farm-gate milk price it pays to suppliers. The Board also considers that through higher returns to suppliers, the Growth Initiatives may encourage dairy farmers to increase investment in their production capacity. Should the Proposed Capital Structure not proceed, the Board has stated the alternative funding mechanism for these growth initiatives would be through debt markets, however it is possible that some or all of the Growth Initiatives would need to be deferred or foregone altogether. We describe below the three key projects MG is undertaking as part of the Growth Initiatives. Page 22 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 85

88 ATTACHMENT 4 ORDINARY SHAREHOLDERS Cheese MG intends to spend approximately $125 million to $145 million over the coming one to two years on expanding production capacity in the Cheese category. MG intends to expand its processing operations into private label and branded cheese slices/snacking due to the higher expected growth rates in these segments compared to block varieties. The new processing facilities are expected to be located in Cobram in Victoria. MG s strategy is to gain operational efficiencies through processing cheese products in a variety of ways (e.g. shredded and snack varieties) and distributing these to Asian markets as well as through domestic distribution lines such as those in its grocery segment. UHT milk MG intends to spend approximately $165 million to $190 million over the coming one to five years expanding production capacity in the UHT category. Australia is the fourth largest exporter of UHT into China, supplying 10% of total imports, behind France, New Zealand and Germany 15. MG s strategy is to increase its production capacity, through a staged investment process, adding processing capacity and the ability to produce a wider range of bottling formats. Nutritionals MG intends to spend approximately $260 million to $300 million over the coming one to five years expanding production capacity in the Nutritionals category. MG intends to construct and commission a new, stand-alone infant formula facility on the current Koroit site in Victoria. The plant will be designed to produce growing-up milk powder, follow-on powder, infant formula, nutritional powder and whole milk powders primarily for the export markets in China, Indonesia and other Asian countries. The investment is expected to commence in the next twelve months subject to signing an offtake agreement with a major global food customer. 15 Beijing Orient Agribusiness Consultants Ltd, China Import Dairy August 2014 Page 23 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 86

89 2.6 Financial performance The following table sets out the statutory audited consolidated statements of financial performance for MG for the financial years ended 30 June 2012 (FY2012), 2013 and Table 7: Summary of financial performance ($ millions) FY2012 FY2013 FY2014 Trading revenue 2, , ,916.5 Revenue growth 3.50% 0.80% 22.30% Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA margin 3.51% 4.93% 3.75% Depreciation and amortisation (52.9) (54.1) (53.2) Earnings before interest and tax (EBIT) EBIT margin 1.28% 2.66% 1.93% Net finance costs (22.2) (24.4) (24.0) Tax (paid)/benefit 6.4 (4.1) (3.0) Net profit after tax (NPAT) NPAT margin 0.61% 1.46% 1.00% Dividends Ordinary shareholders A Class Preference Shareholders B Class Preference Shareholders C Class Preference Shareholders Total dividends paid Source: Deloitte Corporate Finance analysis, MG annual accounts We note the following in relation to the statements of financial performance shown above: revenue grew by 22% to $2.9 billion in FY2014 driven by an increase in milk price as well as volume of milk supplied MG s milk supply grew by 8% in FY2014, despite flat production volumes for the Australian dairy industry as a whole. This was partly a result of MG s entry into New South Wales milk market with the first 10 months of operations resulting in the collection of approximately100 million litres from new suppliers Page 24 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 87

90 ATTACHMENT 4 ORDINARY SHAREHOLDERS distribution, administration and marketing costs comprise the majority of operational expenses aside from milk payments. A break-down of operational expenses for FY2014 is shown in Figure 7 below. Figure 7: Operational expenses Distribution expenses Selling and marketing expenses Administration expenses Finance costs Other expenses Share of loss of associates Source: MG FY2014 Annual Report NPAT was $29.3 million in FY2014, down from $34.9 million in FY2013 partly due to higher costs of goods sold resulting in a decline in gross profit margin from 13.3% to 11.8%. Total payments to suppliers (excluding dividends) represented 61% of sales in FY2014, compared to 50% of sales in FY2013 in FY2014, the Board declared an unfranked final dividend of $0.08 per share for ordinary shares and $0.05 per share for B class and C class preference shares. For Ordinary Shareholders, this equated to a payment of approximately $0.09 per kgms. Figure 8 below shows the historical dividend payments made to ordinary and preference shareholders for the years FY2004 to FY2014 Figure 8: Historical dividends declared in relation to each financial year FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Ordinary dividend A-class dividend B-class dividend C-class dividend Source: MG Note: 1. Dividends shown above relate to dividends declared in relation to each financial year. Payment of these dividends has generally been made in September of the following financial year. 2. The selective capital reduction of A-class preference shares was completed in June As part of the buyback, a deemed dividend of $0.25 was paid to A-class shareholders. No other dividend was announced or paid to A Class Shareholders during FY2014. Page 25 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 88

91 for FY2014, MG paid a final milk price to its suppliers of $6.81 per kgms on an available weighted average basis, a 37% increase from FY2013. The figure below shows the historical milk price paid to farmers for FY2010 to FY2014. Figure 9: Historical available milk price paid Source: MG annual accounts Page 26 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 89

92 ATTACHMENT 4 ORDINARY SHAREHOLDERS 2.7 Financial position The following table sets out the consolidated statements of financial position for MG as at 30 June 2012, 2013 and Table 8: Summary of financial position ($ millions) FY2012 FY2013 FY2014 Cash Receivables Inventories Other Total current assets Receivables Investments accounted for using the equity method Other financial assets Property, plant & equipment Intangible assets Other Total non-current assets Total assets Payables Borrowings Provisions Other Total current liabilities Payables Borrowings Provisions Deferred tax liabilities Total non-current liabilities Total liabilities ,017.5 Net assets Source: Deloitte Corporate Finance analysis, MG annual accounts Note: 1. Other current assets relate to current tax assets and derivative financial assets 2. Other current liabilities relate to derivative financial liabilities We note the following in relation to the statements of financial position presented above: receivables grew from $442.2 million in FY2013 to $536.3 million in FY2014 driven predominantly by an increase in sales, especially export sales the other current assets of $12.1 million as at 30 June 2014 includes prepayments of $5.2 million and deferred capital raising costs of $3.4 million on 2 May 2014, MG announced three new capital projects worth a combined $126 million, which are currently not recognised in the property plant and equipment balances. The projects will be located at MG s Page 27 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 90

93 existing sites in Victoria and Tasmania, will be delivered over a 12 to 18 month period, and are in addition to the Growth Initiatives. The investment will comprise of: o $74 million to build a cheese cut and wrap facility at MG s Cobram site to serve Australian and Asian consumer and food service markets o $38 million to increase production capacity of infant nutrition products at Koroit and Cobram to serve growing international infant nutrition markets o $14 million to install and commission a flexible small format cup and bottle filling line to commercialise a range of dairy beverage products for consumer markets in Australia and Asia. intangible assets as at 30 June 2014 related to goodwill ($12.1 million) and brand names ($4.0 million). Goodwill increased by $6.8 million in FY2012 as a result of MG s acquisition of a 80.1% share in Tasmanian Dairy Products all borrowings are recorded at amortised cost. Bank loans and private placement senior notes are secured by negative pledge agreements between the parent entity and its financiers. The table below shows the financing arrangements for MG as at 30 June 2012, 2013 and Table 9: Summary of MG s borrowings $ millions Audited Actual FY2012 Audited Actual FY2013 Audited Actual FY2014 Current borrowings Bank loans Private placement senior notes Total current borrowings Non-current borrowings Bank loans Private placement senior notes Total non-current borrowings Total borrowings less Cash (34) (12) (14) Net debt Unused credit facilities Source: Deloitte Corporate Finance analysis, MG annual accounts Note: 1. Total borrowings include debt held by investments in associates 2. Figures are subject to rounding Page 28 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 91

94 ATTACHMENT 4 ORDINARY SHAREHOLDERS 3 Quantitative analysis of the Proposed Capital Structure 3.1 Introduction We have undertaken analysis in order to quantify the effect on MG and the Ordinary Shareholders of certain aspects of the Proposed Capital Structure, in order to inform our views as to the advantages and disadvantages of the Proposed Capital Structure from the perspective of the Ordinary Shareholders as a whole. In undertaking our quantitative analysis, we have had regard to the following key questions in relation to the Proposed Capital Structure: whether, if the Proposed Capital Structure is implemented, the Ordinary Shares are likely to trade at a premium to the price at which the Ordinary Shares are able to be traded under the Status Quo, being $1.00 per share, and/or the maximum price at which Ordinary Shareholders will be able to acquire new shares under the Supplier Share Offer of $1.24 per share whether, if the Proposed Capital Structure is implemented, the total payments to Ordinary Shareholders are likely to be higher than under the Status Quo. This bases and outcomes of this analysis are summarised in the following sections. 3.2 Premium to the current trading price for Ordinary Shares In assessing whether the Ordinary Shares will trade at a premium to the price at which they can currently be traded, of $1.00 per Ordinary Share, or the maximum price under the Supplier Share Offer of $1.24 per Ordinary Share, we have undertaken a high level market-based analysis of the price to earnings (P/E) multiple implied for MG by a share price range of $1.00 to $1.24. We refer to Appendix B for an overview of commonly applied valuation methodologies, including the market approach. We have compared the implied FY2015 P/E multiple calculated for MG to the FY2015 P/E multiples of comparable listed companies. We have set out the P/E multiples and descriptions of the comparable listed companies we have considered in Appendix D. The implied FY2015 P/E multiple for MG is 11.2 times to 12.1 times and is lower than any of the FY2015 P/E multiples for the comparable listed companies. Even if the Ordinary Shares traded at the lowest of the trading multiples for the comparable companies, this would represent a premium to both $1.00 per share, being the current price at which the Ordinary Shares can be traded, and $1.24 per share, being the maximum price at which Ordinary Shareholders will be able to participate in the Supplier Share Offer. Consequently, we conclude that following the implementation of the Proposed Capital Structure, the Ordinary Shares are likely to trade at a premium to the price range used in this hypothetical analysis of $1.00 to $1.24 per Ordinary Share. We do not offer any opinion as to the actual multiple at which the Ordinary Shares would trade following the IPO. The unique risks and opportunities facing MG share similarities with, but are ultimately different from the risks and opportunities facing each of the comparable companies, and the IPO price of the Units will be a function of a range of factors including potential investors views on the specific risks and opportunities of holding Units in MG. Page 29 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 92

95 The derivation of the P/E multiple of 11.2 times to 12.1 times based on a price per Ordinary Share of $1.00 and $1.24 is set out in the table below. Table 10: Implied P/E multiple for MG based on a price per Ordinary Share of $1.00 to $1.24 Unit Low High Note and sources Estimate of the FY2015 milk pool Full-year FY2015 milk price $ MG announcement dated 27 February 2015 Milk supplied (FY2014) million kgms MG southern region volume for FY2014 Estimated milk supply Based on Dairy Australia Limited s (Dairy Australia) million kgms (FY2015) 2.0% expected FY2015 growth rate for Australia Estimated FY2015 milk payments $ million 1,422 1,422 Milk price times estimated milk supply for FY2015 NPAT guidance for FY2015 $ million MG announcement dated 27 February 2015 Estimated FY2015 milk pool $ million 1,442 1,452 Applying the Profit Share Mechanism to the estimated FY2015 milk pool results in an allocation to NPAT for FY2015 as follows: Based on the application of the Profit Share Implied NPAT $ million Mechanism Calculation of P/E multiple based on an Ordinary Share price of $1.00 to $1.24 Price implied by the current trading price and the Share price $ maximum Supplier Share Offer price Estimated based on 282 million existing Ordinary Estimated shares outstanding million Shares + 25 million Preference Shares + $500m following IPO raised at the share price Estimated NPAT per share $ Implied PE multiple $ 11.2x 12.1x Source: MG, Deloitte Corporate Finance analysis 3.3 Total payments to the Ordinary Shareholders Financial projections MG has provided us with a financial model (the Model) prepared by the management of MG, which has formed the basis of our analysis. The Model contains detailed financial performance projections and cash flow projections, including farmgate milk prices and distributions paid to Ordinary Shareholders and Unitholders, up to and including the financial year ending FY2019, based on the following key inputs which have been either approved or endorsed by the Board: the budgets for FY2015 and FY2016 the internal 5-year business plan for MG (the Business Plan) incorporating the Growth Initiatives the Profit Share Mechanism. The Model has been built to enable analysis of a range of potential scenarios in relation to the future strategy of MG, including analysis of the financial outcomes for Ordinary Shareholders with and without proceeding with the Growth Initiatives and the implementation of the Proposed Capital Structure. Based on the Model, we have analysed the financial outcomes for Ordinary Shareholders under the following scenarios: Status Quo: MG implements the Business Plan, excluding the Growth Initiatives Debt Funding: MG implements the Business Plan, including the Growth Initiatives, which are debt funded, with debt drawn down as capital expenditures are incurred. Under this scenario, not all of the Growth Initiatives can be funded before breaching debt covenants Proposed Capital Structure: MG implements the Business Plan, including the Growth Initiatives, which are funded through the IPO of the Unit Trust. Under this scenario, the IPO of the Unit Trust results in Page 30 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 93

96 ATTACHMENT 4 ORDINARY SHAREHOLDERS additional costs for undertaking and maintaining the listing and the Shareholder Trading Platform, and funds raised from the IPO are used to repay existing debt, which is then redrawn over time to fund the Growth Initiatives. The payments to Ordinary Shareholders are based on the Profit Share Mechanism which determines the distribution of the milk pool between milk payments to suppliers, tax and net profit after tax (which is then allocated between Ordinary Shareholder dividends, Unitholder distributions and retained earnings). Analysis of the financial projections We have undertaken sufficient work to assess whether the financial projections and the Model are suitable for the purposes of preparing quantitative analysis in relation to the advantages and disadvantages of the Proposed Capital Structure in accordance with ASIC Regulatory Guide 111. Our work has been focused on assessing the incremental returns from undertaking the Growth Initiatives and the impact of the Proposed Capital Structure on total returns to the Ordinary Shareholders. Our work has included the following: analysing the Model, including limited procedures regarding the mathematical accuracy of the Model (but have performed neither a review nor an audit of the Model) comparing projected financial performance in the Model to the historical financial performance of MG reviewing the basis of the underlying assumptions, including: o understanding the process through which MG has gone to develop the Growth Initiatives o reviewing the business plans and other internal strategy documents supporting the Growth Initiatives o ensuring consistency between the business plans and other internal strategy documents supporting the Growth Initiatives and the projections in the Model considering the reasonableness of the projections for the Growth Initiatives, including: o analysis of the quantum and timing of the capital expenditures, compared to the costs and timelines of similar projects o analysis of the incremental revenue to be generated from the Growth Initiatives, including the projected market shares in the key markets in which the production from the Growth Initiatives are projected to be sold, based on supporting research and documentation provided by MG, and our own industry research and analysis o in undertaking our analysis, nothing has come to our attention that would suggest that the projections have not been prepared on a reasonable basis holding discussions with MG s management concerning the preparation of the projections, and their views regarding the assumptions on which they are based. There has been an appropriate level of rigour behind the processes applied and use of external advisors in substantiating and testing underlying assumptions. We note that the financial projections in the Model are based on underlying assumptions including commodity prices and exchange rates. We have performed our quantitative analysis based on a range of commodity price and exchange rate assumptions. We note that applying higher and lower commodity prices and exchange rates than those adopted in the Model results in changes to the quantum and timing of returns to Ordinary Shareholders as a result of the Proposed Capital Structure, but does not change the conclusions drawn from our analysis, or our opinion. Analysis of total payments to the Ordinary Shareholders following the Proposed Capital Structure As described in Section 1.3, the Profit Share Mechanism determines both the level of milk payments paid to Ordinary Shareholders, and the level of dividends and distributions paid to Ordinary Shareholders and Unitholders, respectively. Based on the Model, we have calculated the total payments to Ordinary Shareholders under the Status Quo and the Proposed Capital Structure and note the following: the proceeds from the IPO will be used to fund the capital expenditures required to implement the Growth Initiatives, which will be incurred over the period to FY2018. The returns from the investment in the Growth Initiatives will start to benefit earnings from FY2016 onwards, through increased operational efficiencies, and higher volumes of higher margin products sold. However, following the IPO, some of the Page 31 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 94

97 returns from the Growth Initiatives will be used to fund distributions to Unitholders from FY2016 onwards. The net impact of these factors is that total payments to the Ordinary Shareholders are projected to be lower under the Proposed Capital Structure relative to the Status Quo scenario in the short to medium term the earnings from the Growth Initiatives are projected to continue to increase over time, with earnings from some of the capital expenditures only starting to be realised from FY2019 onwards. As a result, total payments to the Ordinary Shareholders are projected to be higher under the Proposed Capital Structure relative to the Status Quo from the medium term onwards. We have also considered the payments to Ordinary Shareholders with shareholdings at, above or below the Share Standard (i.e. total supplier payout per kg of milk solids supplied, based on holding one Ordinary Share per kg of milk solids supplied): above the Share Standard: on average, shareholdings of suppliers are above the Share Standard. Relative to the Status Quo scenario, dividend payments are projected to be higher under the Proposed Capital Structure, and accordingly the incremental returns from the Growth Initiatives are expected to benefit those with shareholdings above the Share Standard to a greater extent than those with shareholdings at or below the Share Standard at the Share Standard: it is expected to take until the medium term to receive higher total payments for Ordinary Shareholders whose shareholdings are at the Share Standard below the Share Standard: our analysis suggests that to receive higher payments under the Proposed Capital Structure than under the Status Quo scenario may take some years longer for Ordinary Shareholders with shareholdings significantly below the Share Standard at the date of the IPO compared to Ordinary Shareholders at the Share Standard, with the length of time increasing the further the Ordinary Shareholder is below the Share Standard. We note that Ordinary Shareholders with shareholdings below the Share Standard have the opportunity to acquire additional shares up to the Share Standard prior to the IPO, through the Supplier Share Offer. The Supplier Share Offer price will be at a price of between $1.00 and $1.24 per share (depending on their tenure of supply), a discount to the IPO price expected by the Board. We note that approximately 58% of the Ordinary Shareholders currently have shareholdings above the Share Standard, and approximately 42% of the Ordinary Shareholders have shareholdings below the Share Standard. MG estimates that following the Supplier Share Offer and the priority share offer that approximately 80% of Ordinary Shareholders will be at or above their Share Standard and the remaining 20% will be below their Share Standard. Page 32 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 95

98 ATTACHMENT 4 ORDINARY SHAREHOLDERS Appendix A: Context to the report Individual circumstances We have evaluated the Proposed Capital Structure for the Ordinary Shareholders as a whole and have not considered the effect of the Proposed Capital Structure on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposed Capital Structure from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Proposed Capital Structure is in the best interests of the Ordinary Shareholders. If in doubt investors should consult an independent adviser, who should have regard to their individual circumstances. Limitations, qualifications, declarations and consents The report has been prepared at the request of the Directors of MG and is to be included in the Capital Structure Booklet to be given to the Ordinary Shareholders in relation to the approval of the implementation of the Proposed Capital Structure. Accordingly, it has been prepared only for the benefit of the Directors and those persons entitled to receive the Capital Structure Booklet in their assessment of the Proposed Capital Structure outlined in the report and should not be used for any other purpose. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the Directors, Ordinary Shareholders and MG, in respect of this report, including any errors or omissions however caused. Further, recipients of this report should be aware that it has been prepared without taking account of their individual objectives, financial situation or needs. Accordingly, each recipient should consider these factors before acting on the Proposed Capital Structure. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited. The report represents solely the expression by Deloitte Corporate Finance of its opinion as to whether the Proposed Capital Structure is in the best interests of the Ordinary Shareholders as a whole. Deloitte Corporate Finance consents to this report being included in the Capital Structure Booklet. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Deloitte Corporate Finance has relied upon the completeness of the information provided by MG and its officers, employees, agents or advisors which Deloitte Corporate Finance believes, on reasonable grounds, to be reliable, complete and not misleading. Deloitte Corporate Finance does not imply, nor should it be construed, that it has carried out any form of audit or verification on the information and records supplied to us. Drafts of our report were issued to MG management for confirmation of factual accuracy. In recognition that Deloitte Corporate Finance may rely on information provided by MG and its officers, employees, agents or advisors, MG has agreed that it will not make any claim against Deloitte Corporate Finance to recover any loss or damage which MG may suffer as a result of that reliance and that it will indemnify Deloitte Corporate Finance against any liability that arises out of either Deloitte Corporate Finance s reliance on the information provided by MG and its officers, employees, agents or advisors or the failure by MG and its officers, employees, agents or advisors to provide Deloitte Corporate Finance with any material information relating to the Proposed Capital Structure. To the extent that this report refers to prospective financial information we have considered the prospective financial information and the basis of the underlying assumptions. The procedures involved in Deloitte Corporate Finance s consideration of this information consisted of enquiries of MG personnel and analytical procedures applied to the financial data. These procedures and enquiries did not include verification work nor constitute an audit or a review engagement in accordance with standards issued by the Auditing and Assurance Standards Board or equivalent body and therefore the information used in undertaking our work may not be entirely reliable. Based on these procedures and enquiries, Deloitte Corporate Finance considers that there are reasonable grounds to believe that the prospective financial information for MG included in this report has been prepared on a reasonable basis in accordance with ASIC Regulatory Guide 111. In relation to the prospective financial information, actual results may be different from the prospective financial information of MG referred to in this report since anticipated events frequently do not occur as expected and the variation may be material. The achievement of the prospective financial information is dependent on the outcome of the assumptions. Accordingly, we express no opinion as to whether the prospective financial information will be achieved. Page 33 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 96

99 Deloitte Corporate Finance issued to MG a full draft of an earlier version of this report, based on an earlier version of the Profit Sharing Mechanism. Our opinion did not change as a result of the change to the final version of the Profit Sharing Mechanism shown in this report, which is more favourable to supplier/shareholders and less dilutive to the milk price. Deloitte Corporate Finance holds the appropriate Australian Financial Services Licence to issue this report and is owned by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte Corporate Finance principally involved in the preparation of this report were Stephen Reid, B.Ec, M.App.Fin.Inv., CA, F.Fin and Rachel Foley-Lewis, B.Com., CA, F.Fin. Each has many years experience in the provision of corporate financial advice, including specific advice on valuations, mergers and acquisitions, as well as the preparation of expert reports. Consent to being named in disclosure document Deloitte Corporate Finance Pty Limited (ACN ) of 550 Bourke Street, Melbourne, VIC 3000 acknowledges that: MG proposes to issue a Capital Structure Booklet in respect of the Proposed Capital Structure the Capital Structure Booklet will be issued in hard copy and be available in electronic format it has previously received a copy of the draft Capital Structure Booklet (draft Capital Structure Booklet) for review it is named in the Capital Structure Booklet as the independent expert and the Capital Structure Booklet includes its independent expert s report in Attachment 4 of the Capital Structure Booklet. On the basis that the Capital Structure Booklet is consistent in all material respects with the draft Capital Structure Booklet received, Deloitte Corporate Finance Pty Limited consents to it being named in the Capital Structure Booklet in the form and context in which it is so named, to the inclusion of its independent expert s report in Attachment 4 of the Capital Structure Booklet and to all references to its independent expert s report in the form and context in which they are included, whether the Capital Structure Booklet is issued in hard copy or electronic format or both. Deloitte Corporate Finance Pty Limited has not authorised or caused the issue of the Capital Structure Booklet and takes no responsibility for any part of the Capital Structure Booklet, other than any references to its name and the independent expert s report as included in Attachment 4. Sources of information In preparing this report we have had access to the following principal sources of information: annual report/s for MG for the year ended 30 June 2012 to 30 June 2014 internal strategy documents prepared by MG annual reports for comparable companies company websites for MG and comparable companies publicly available information on comparable companies and market transactions published by ASIC, Thompson Research, Capital IQ, and Mergermarket other publicly available information, media releases and brokers reports on MG, comparable companies and the dairy industry. In addition, we have had discussions and correspondence with certain directors and executives, including Peter Hawkins, Director, Phillip Tracy, Chairman and David Noonan, General Manager Corporate Development, in relation to the above information and to current operations and prospects. Page 34 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 97

100 ATTACHMENT 4 ORDINARY SHAREHOLDERS Appendix B: Valuation methodologies To the extent that our analysis of the Proposed Capital Structure is based on estimates of fair market value, we have considered common market practice and the valuation methodologies recommended by ASIC Regulatory Guide 111, which provides guidance in respect of the content of independent expert s reports. These are discussed below. Market based methods Market based methods estimate a company s fair market value by considering the market price of transactions in its securities or the market value of comparable companies. Market based methods include: capitalisation of maintainable earnings analysis of a company s recent share trading history industry specific methods. The capitalisation of maintainable earnings method estimates fair market value based on the company s future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from market transactions involving comparable companies. The capitalisation of maintainable earnings method is appropriate where the company s earnings are relatively stable. The most recent share trading history provides evidence of the fair market value of the securities in a company where they are publicly traded in an informed and liquid market. Industry specific methods estimate market value using rules of thumb for a particular industry. Generally rules of thumb provide less persuasive evidence of the market value of a company than other valuation methods because they may not account for company specific factors. Discounted cash flow methods Discounted cash flow methods estimate market value by discounting a company s future cash flows to a net present value. These methods are appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. Discounted cash flow methods are commonly used to value early stage companies or projects with a finite life. Asset based methods Asset based methods estimate the market value of a company s securities based on the realisable value of its identifiable net assets. Asset based methods include: orderly realisation of assets method liquidation of assets method net assets on a going concern basis. The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to shareholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the company may not be contemplated, these methods in their strictest form may not necessarily be appropriate. The net assets on a going concern basis method estimates the market values of the net assets of a company but does not take account of realisation costs. These asset based methods ignore the possibility that the company s value could exceed the realisable value of its assets as they ignore the value of intangible assets such as customer lists, management, supply arrangements and goodwill. Asset based methods are appropriate when companies are not profitable, a significant proportion of a company s assets are liquid, or for asset holding companies Page 35 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 98

101 Appendix C: Dairy industry The Australian dairy industry The Australian dairy industry is a $13 billion farm, manufacturing and export industry accounting for around 8% of the gross value of agricultural production and $2.2 billion in export income 16. Around 9.5 billion litres of milk is produced a year by Australia s 6,700 dairy farmers. The domestic dairy industry directly employs 43,000 Australians on farms and in factories, while more than 100,000 Australians are indirectly employed in related service industries 17. Dairying is a well-established industry across temperate and some subtropical areas of Australia. Fresh milks, custards, yogurts and a wide variety of cheese types are produced in most Australian states. The following figure shows the location of dairy production in Australia. Figure 10 Source: Australian Bureau of Resources, Economics and Sciences (ABARES) Australian Dairy Industry Survey While the majority of Australian milk is produced in the south-eastern states, all states have dairy industries that supply fresh drinking milk to nearby cities and towns. However, manufacturing of longer shelf life products (e.g. cheese and specialised milk powders) is becoming more concentrated in the south-east region of Australia, where the majority of MG s operations and suppliers are based. Deregulation of the Australian industry In early 1999, the Australian Dairy Industry Council approached the Federal Government with a plan for a national approach to the deregulation of the drinking milk sector in conjunction with the end of price control and subsidies on manufactured milk. On 28 September 1999, the Federal Government announced it would implement the Dairy Structural Adjustment Program (DSAP), to assist it to make the necessary adjustments to a deregulated environment. The DSAP imposed of a retail levy of 11 cents per litre on dairy beverages, which funded quarterly DSAP payments (over eight years) to Australian dairy farmers. By 1 July 2000, all states had repealed legislation governing sourcing and pricing of drinking milk. The impact of deregulation at the farm level varied by state and was predominantly dependant on how important drinking 16 Australian Bureau of Statistics Dairy Australia Page 36 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 99

102 ATTACHMENT 4 ORDINARY SHAREHOLDERS milk was to the farm in relation to their total production. Broadly, the impacts of this deregulation were a decrease in the number of farms, the continuation of an industry trend that has been apparent for over three decades. The below graph depicts the number of Australian dairy farms by herd size and milk receipts from to Figure 11 10,000 1,800 Number of farms 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-1,600 1,400 1,200 1, Average receipts ($'000) Source: ABARES Australian Dairy Industry Survey Note: is a provisional projection period As seen above, the number of dairy farms in Australia fell by around 45% between and The number of small farms (milking less than 200 cows a year) declined by around two-thirds and accounted for much of the decline in the total number of farms. These changes have resulted in a more efficient dairy industry and an increase in the average gross value of Australian dairy production at the farm level in real terms. Large farms, and to a lesser extent medium farms, have been able to take advantage of periods of favourable milk prices and production conditions to record well-above average farm incomes in some years. Incomes of small farms have remained modest because of their lower capacity to increase milk production when seasonal conditions are favourable. Recent trends in Australian milk production and pricing Figure 12 below shows historical milk production in Australia for the nine years from FY2006 to FY2014. Figure 12 10,200 10,000 Less than 200 cows milked 200 to 350 cows milked more than 350 cows milked Number of farms (LHS) Milk receipts (RHS) Milk production (Million litres) 9,800 9,600 9,400 9,200 9,000 8,800 8,600 8, Source: Dairy Australia Australian milk production increased by just fewer than 40 million litres, or 0.4%, to 9.24 billion litres in FY2014, reflecting improved conditions on a difficult prior year for many dairy farmers. Although seasonal conditions remained drier and generally unfavourable in northern regions, broadly more favourable rainfall and temperatures prevailed across the south-eastern dairying regions. Australian milk prices are based on the milkfat and protein solids content of the milk supplied off farm. Unlike in the US and the Eurozone, in Australia there is no legislative control over the price milk processing companies pay farmers for their milk. Page 37 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 100

103 Figure 13 and Figure 14 below show historical farm-gate prices for milk and milk solids, over the six years from FY2009 to FY2014. Figure 13: Milk price cents per litre by state Source: Dairy manufacturers, Dairy Australia, Deloitte Corporate Finance analysis Note: 1. NSW = New South Wales, VIC = Victoria, QLD = Queensland, SA = South Australia, WA = Western Australia and TAS = Tasmania Figure 14: Milk solids $/Kg by state Source: Dairy manufacturers, Dairy Australia, Deloitte Corporate Finance analysis Note: 1. NSW = New South Wales, VIC = Victoria, QLD = Queensland, SA = South Australia, WA = Western Australia and TAS = Tasmania The variance in milk prices amongst states is caused by a number of factors, including: weather conditions. Dairy production is heavily reliant upon water availability and it is not uncommon for states to experience varied agricultural conditions resulting in some variation in farm-gate price between states the level of domestic demand for milk. Milk processors in Western Australia and the northern states have offered production incentives and modest increases to farm-gate milk prices to encourage farmers to maintain or increase milk supply, as milk volumes continue to decrease in these regions the extent to which milk production is exported. The south eastern region exports a larger proportion of its milk production than other states, and therefore south eastern milk prices are more sensitive to changes in global milk prices than other states. Global milk benchmarks are volatile and subject to the impact of currency movements. Figure 15 below shows the global dairy trade price, which represents the close price from the Global Dairy Trade (GDT) auction platform for internationally traded commodity dairy products. GDT auctions attract hundreds of active bidders, between them, representing more than 90 countries. Figure 15 FY09 FY10 FY11 FY12 FY13 FY14 NSW VIC QLD SA WA TAS AUST FY09 FY10 FY11 FY12 FY13 FY14 NSW VIC QLD SA WA TAS AUST Source: GDT Farm-gate milk prices in the exporting regions of Australia are particularly sensitive to changes in global prices. Global milk prices in 2014 have been influenced by the following factors, resulting in lower milk prices for Australian producers: as at April 2014, Dairy Australia s skim-milk powder (SMP) based Affordability Index suggested that dairy affordability was below its 5-year average in all markets except Indonesia, Japan and Russia key exporting countries, such as Germany, France and New Zealand, continue to increase production despite milk becoming increasingly affordable for importing nations Page 38 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 101

104 ATTACHMENT 4 ORDINARY SHAREHOLDERS Russia has implemented a partial ban on agricultural imports, restricting the ability of certain producers to supply dairy products into Russia concerns over global macroeconomic factors such as the slowing of China s economic growth and growth in the Eurozone. Export markets for Australian dairy products The majority of Australia s dairy exports go to Asian markets. As shown in Figure 16 and Figure 17 below, 56% of Australia s milk exports go to Singapore, Hong Kong, China and South Korea, and 47% of Australia s cheese exports go to Japan, China, Singapore and Indonesia. Figure 16: Milk exports by country Figure 17: Cheese exports by country 19% 21% 44% 17% 53% 11% 9% 6% 14% 6% Singapore Hong Kong China South Korea Other Source: IBIS World Pty Ltd (IBIS) Japan China Singapore Indonesia Other Source: IBIS, Deloitte Corporate Finance analysis Over the last five years, growth in demand for dairy has largely been driven by increasing demand for dairy goods from developing markets in Asia, South America and the Middle East. This increase in demand in these key export markets can largely be attributed to the following factors: there is a strong positive correlation between dairy consumption and economic development. As these economies have grown and become more prosperous, this has fuelled demand for dairy products increased awareness of the importance of nutrition for the health of both infants and aging populations have driven growth in demand for protein- and calcium-rich foods, particularly driven by an aging population in China in China, historically, the main sources of calcium were green vegetables, beans, wheat and rice and the large majority of the population was lactose intolerant. As dairy consumption in China has increased, so has the population s ability to digest lactose. This has driven an increase in demand for dairy products, and greater dependence on dairy products as a source of protein and calcium concerns over food security, particularly in response to high-profile cases of contamination of dairy products in China, have driven consumers to place greater value on high-quality dairy produce imported from countries with well-established quality control standards. Given the strong reliance of Australia s dairy export industry on demand in Asian markets, the future growth rates of Australia s dairy industry are likely to be strongly tied to the future growth rates of demand for dairy products in key Asian markets. Page 39 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 102

105 The following figure shows the change in dairy import volumes in key emerging markets for the calendar year to May 2014, demonstrating the strong growth in demand for imported dairy products in Asian markets. Figure 18 Source: Dairy Australia According to IMA, an independent dairy research provider who prepared research for Dairy Australia, the historical trends of increasing dairy consumption in developing and emerging Asian economies are expected to continue over the period 2015 to 2020, as shown in the following table. Table 11 Country Dairy consumption compound annual growth rate (CAGR) ( ) Thailand 3.7% Indonesia 5.9% Malaysia 4.6% Philippines 6.6% Singapore 3.9% Vietnam 6.6% Source: IMA, Dairy Australia As shown in Table 12 below, market research company Canadean projects growth in dairy consumption in China over the period 2013 to 2018 to be 9.4% p.a. across all product categories, higher than historical growth over the period from 2008 to As shown in Figure 19 below, milk was by far the largest category by value of dairy product sold in China in 2013, followed by yoghurt, with cheese, butter, cream and desserts combined accounting for less than 3% of the value of dairy products sold. Table 12 Figure 19 Category CAGR ( ) CAGR ( ) Butter 9.0% 10.7% Cheese 11.8% 12.6% Cream 6.8% 7.4% Desserts 7.5% 8.1% Milk 8.7% 9.6% Yoghurt 7.9% 8.6% 24.6% 0.7% 1.4% 0.1% 0.6% Overall 8.6% 9.4% Source: Canadean 72.6% Butter Cheese Cream Desserts Milk Yoghurt Source: Canadean Page 40 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 103

106 ATTACHMENT 4 ORDINARY SHAREHOLDERS While some of the increase in demand for dairy products in China will likely be met through increases in domestic Chinese production, as shown in Figure 20 below, historically growth in imports has outpaced growth in domestic production. Figure 20 1,400 1,200 1, ,030 1,150 1, ,030 1,100 1, Production Imports Source: Institute For Agriculture And Trade Policy According to the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) of the United Nations, total imports of dairy products is projected to rise by approximately 60% from 2012 to 2022, equating to a CAGR of 4.8%. 18 In the sections below we provide brief commentary on the outlook for Chinese demand for milk, cheese and infant formula. Chinese demand for milk imports Figure 21 below shows the historical and forecast demand for milk in China. Figure 21 30,000.0 China Market Volume (Kg m) 25, , , , , Source: Canadean F 2015F 2016F 2017F Domestic milk production in China is projected to grow at a CAGR of 2.4% p.a. from 2012 to 2022, 19 considerably slower than projected growth in demand, implying considerable scope for growth in the market for imported milk products in China. The rate of growth in imports of milk products differs among categories, reflecting changes in the mix of imported milk products over time. 18 OECD-FAO, China: Self-sufficiency for major commodities, 19 OECD-FAO, China: Self-sufficiency for major commodities, Page 41 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 104

107 Chinese demand for infant formula imports Given increasing awareness of the importance of infant nutrition, as described above, demand for infant formula in China is expected to experience strong growth. China s share of total global import volumes of infant formula has increased from 13% in 2007 to 30% in This trend is expected to continue with Beijing Orient Agribusiness Consultants Ltd projecting that the short-term CAGR for infant formula to be 35%. 20 Figure 22 below shows that growth in imports of infant formula into China has far exceeded import growth globally. For the period from 2007 to 2013, the volume of infant formula imports into China grew at a CAGR of 23%, compared to 7% for imports globally. Figure 22 60% 50% 48% 40% 34% 30% 20% 18% 18% 17% 10% 0% 6% China YOY growth (IF imports) China CAGR Global CAGR Source: MG Chinese demand for cheese imports There has been strong growth in demand for cheese in China over the last decade, driven by increasing disposable incomes and exposure to Western-style food. Cheese exports from Australia into China almost tripled over the ten years to 2012, and from 2012 to 2014, China rose from Australia's sixth largest to its second largest market for cheese exports. Figure 23 below shows the historical and forecast demand for cheese in China. Figure China Market Volume (Kg m) Source: Canadean F 2015F 2016F 2017F 2018F 20 The time frame for the Beijing Orient Agribusiness Consultants Ltd forecasts is not specified. Page 42 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 105

108 ATTACHMENT 4 ORDINARY SHAREHOLDERS Conclusion The macroeconomic trends driving increased demands for dairy products in Asia are projected to continue, as economic development and urbanisation increases the standard of living in key Asian markets. Based on the data set out above, the outlook is strong for exports of Australian dairy products into the key growth markets being targeted by MG s Growth Initiatives. Page 43 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 106

109 Appendix D: Comparable entities Table 13 Enterprise value P/E multiple NPAT margin Name ($ million) FY2015 FY2016 FY2015 FY2016 Australian and New Zealand dairy producers and distributors Fonterra Co-operative Group 13, x 12.9x 3.8% 3.7% Bega Cheese Limited x 18.9x 2.3% 3.2% WCB 520 n/a n/a n/a n/a The a2 Milk Company Limited 333 n/a n/a n/a n/a Average 21.1x 15.9x 3.1% 3.4% International dairy producers and distributors Saputo 16, x 20.2x 5.7% 6.1% China Mengniu Dairy Co. Limited 12, x 27.6x 4.1% 4.6% Parmalat SpA 4, x 18.1x 3.7% 3.8% Emmi AG 3, x 19.0x 2.9% 2.9% Fromageries Bel 3,150 n/a n/a n/a n/a Unibel S.A 2,507 n/a n/a n/a n/a Vitasoy International Holdings Limited 2,197 n/a 30.4x n/a 7.4% Bongrain SA 1, x n/a 1.2% n/a Hochdorf Holding AG 252 n/a n/a n/a n/a Average 21.7x 23.1x 3.5% 4.9% Nutritional and Probiotic dairy processers Mead Johnson Nutrition Company 26, x 22.9x 17.7% 18.1% Yakult Honsha Company Limited 14,617 n/a n/a n/a n/a Average 25.1x 22.9x 17.7% 18.1% Diversified food producer Nestlé S.A. 331, x 21.4x 11.5% 11.7% Mondelez International Incorporated 93, x 17.6x 9.2% 10.1% Danone 51, x 19.6x 7.7% 8.0% Goodman Fielder Limited 1,858 n/a n/a n/a n/a Average 21.5x 19.5x 9.5% 10.0% Source: Capital IQ, Deloitte Corporate Finance analysis Notes: 1. Enterprise values as at 18 March n/a = not available Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

110 ATTACHMENT 4 ORDINARY SHAREHOLDERS Table 14 Revenue segmentation (last reported year) Company Product Geographic Description Australian and New Zealand dairy producers and distributors Fonterra Co-operative Group Fonterra Co-operative Group Limited engages in the collection, manufacture, and sale of milk and milk derived products in New Zealand, Europe, Asia, Australia, the United States, Latin America and internationally. Fonterra Co-operative Group Limited offers its products primarily under the Anlene, Anmum, Anchor, Fernleaf, Boneeto, Ratthi, Mainland, Bega, NZMP and Western Star brands. It also provides foodservice products with a range of dairy products and chef-led solutions to chefs, bakers, caterers, commercial kitchens, hotels, restaurants and cafes. Fonterra Co-operative Group Limited was founded in 2001 and is based in Auckland, New Zealand. Bega Cheese Limited Bega receives, processes, manufactures and distributes dairy and associated products in Australia. The company operates in two segments, Bega Cheese and Tatura Milk. The Bega Cheese segment manufactures natural WCB Oceania 13% Latin America (LATAM) 4% Asia 8% Tatura Milk 37% Corporate -10% Consumer Goods 6% Other 2% New Zealand Milk Products (NZMP) 65% Bega Cheese 63% Commodities 92% Latin America (LATAM) 8% United States of America 5% New Zealand 10% Other Countries 30% Rest of World 15% Australia 7% Europe 4% China 25% Rest of Asia 26% Australia 70% No segment information available cheese, processed cheese, powders, butter and packages cheese products. The Tatura Milk segment manufactures and packages cream cheese, butter, powders and nutritionals products. Bega Cheese Limited exports its products to approximately 40 countries in the Middle East, South East Asia, North Asia, central and South America, and the Pacific Islands. The company is headquartered in North Bega, Australia. WCB produces and sells dairy products in Australia and internationally. The company operates through three segments: Commodities, Consumer Goods and Other. The company markets its products to wholesale and retail customers, as well as exports its products. WCB was founded in 1888 and is headquartered in Allansford, Australia. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

111 Revenue segmentation (last reported year) Company Product Geographic Description The a2 Milk Company Limited No segment information available China 3% United Kingdom 1% The a2 Milk Company Limited commercializes a2 brand milk and related products in New Zealand. The company owns intellectual property that enables the identification of cattle for the production of a2 brand milk. The a2 brand milk is cows milk that contains A2 beta-casein proteins. The a2 Milk Company Limited is based in Auckland, New Zealand. Australia 96% International dairy producers and distributors Saputo No segment information available Saputo Inc. produces, markets, distributes, and exports various dairy products in Canada, the United States, Argentina, and Australia. The company offers a range of cheese products, such as Italian cheeses, cheddar, and specialty and fine cheeses; dairy products, including fluid milk, flavoured milk, cream, yogurt, butter and butter blends, and milk powder; dairy and non-dairy products, such as cream and flavoured coffee creamers, juices and drinks, ice cream mixes, whipping cream, aerosol whipped toppings, and iced coffee; and cultured products comprising sour cream and cottage cheese, as well as provides functional milks, value-added products, and organic products. Saputo Inc. was founded in 1954 and is headquartered in Saint-Léonard, Canada. Milk Other dairy China Mengniu Dairy Co. Ltd. China Mengniu Dairy Company Limited, an Ice cream 7% powder 5% 1% Liquid milk 87% USA 49% Rest of World 12% Canada 39% Mainland China 100% investment holding company, manufactures and distributes dairy products in China. The company operates in four segments: Liquid Milk Products, Ice Cream Products, Milk Powder, and Other Dairy Products. The company offers its dairy products under the MENGNIU brand. China Mengniu Dairy Company Limited was founded in 1999 and is based in Causeway Bay, Hong Kong. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

112 ATTACHMENT 4 ORDINARY SHAREHOLDERS Revenue segmentation (last reported year) Company Product Geographic Description Parmalat SpA No segment information available Parmalat SpA, together with its subsidiaries, produces and distributes milk, dairy products, and fruit beverages. The company operates in three segments: Milk, Dairy Products, and Fruit Beverages. The Milk segment offers UHT, pasteurized, condensed, powdered, and flavoured milk products, as well as cream and béchamel. The Dairy Products segment provides yogurt, fermented milk, desserts, cheese, and butter. The Fruit Beverages segment offers fruit juices, nectars, and tea. It operates in Europe, North America, Latin America, Africa, and Australia. The company was founded in 1961 and is headquartered in Collecchio, Italy. Parmalat SpA operates as a subsidiary of Société pour le Financement de l'industrie Laitière SAS. Emmi AG Emmi AG is engaged in the development, Cheese 32% Powders Fresh 3% Cheese 5% Other 5% Dairy 30% Fresh Products 25% production and marketing a range of dairy and fresh products worldwide. It primarily focuses on fresh products, such as lifestyle, convenience, and health products. Its dairy products comprise milk, cream, butter, yoghurt, milk drinks, curd, and desserts. The company is also involved in production, ageing, and trade of cheese, including hard, semi-hard, soft and processed cheese. The company was incorporated in 1993 and is headquartered in Switzerland. Emmi AG is a subsidiary of ZMP Invest AG. Fromageries Bel Middle East Fromageries Bel engages in the creation, Food Processing 100% Africa 7% Latin America 11% Rest of Europe 27% Greater Africa 10% Americas and Asia Pacific 15% Australia 17% Americas 12% 13% Rest of Europe 22% Africa 4% Asia/Pacific 1% Europe 21% North America 44% Switzerland 56% Western Europe 40% production, and sale of branded cheeses in France and internationally. The company also provides milk and cream. It offers its products under 5 core brands, including The Laughing Cow, Kiri, Leerdammer, Boursin, and Mini Babybel, as well as under approximately 25 local brands. The company was founded in 1865 and is headquartered in Paris, France. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

113 Revenue segmentation (last reported year) Company Product Geographic Description Middle East Unibel S.A. Unibel S.A., together with its subsidiaries, Greater Africa 10% 13% Western Europe 39% produces and sells cheese products in Western and Eastern Europe, Americas, Asia/Pacific, Near-East and Middle-East, and Africa. The company was founded in 1921 and is headquartered in Paris, France. Americas & Asia Pacific 15% Food Processing Rest of 100% Europe 22% Vitasoy International Holdings Limited Vitasoy International Holdings Limited, together with its subsidiaries, manufactures Singapore and sells food and beverages. The company North 2% America provides soy drink and tofu under the brand 11% name of Vitasoy; a range of teas, juices, Australasia 10% wellness drinks, distilled water, and dairy-milk products under the brand name of Vita; and Hong Kong and Macau natural soy-based products and desserts, 42% pasta, and noodles. It also offers products under the brand names of Calci-Plus, Tsing Mainland China Food and Sum Zhan, San Sui, Soy Milky, Nasoya, 35% beverages Azumaya, and UNICURD. Vitasoy 100% International Holdings Limited was founded in 1940 and is headquartered in Tuen Mun, Hong Kong. Bongrain SA Other Bongrain SA produces and distributes cheese Other Dairy Products 39% 1% Cheese Products 60% Other Countries 28% Rest of Europe 40% France 32% and other dairy specialties, and dairy ingredients in France, other countries in Europe, and internationally. It provides various cheese products, such as soft, fresh, pressed, and processed cheeses for use in cheeseboard, cuisine, salads, spreads, sandwiches, snacks, aperitifs, etc. The company is based in Viroflay, France. Bongrain SA is a subsidiary of Soparind SCA. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

114 ATTACHMENT 4 ORDINARY SHAREHOLDERS Revenue segmentation (last reported year) Company Product Geographic Description Hochdorf Holding AG Middle Rest HOCHDORF Holding AG, through its Food Processing 100% Europe 21% East/Africa 12% Asia 7% 2% Switzerland 58% subsidiaries, produces and sells various food products in Switzerland and internationally. It offers milk derivatives, such as milk powder, cream powder, milk protein powder, milk protein powder, whey powder, fat powder, condensed milk, and cream. The company serves the food industry and the retail sector. HOCHDORF Holding AG was founded in 1895 and is based in Hochdorf, Switzerland. Nutritional and Probiotic dairy processers Mead Johnson Nutrition Company United Mead Johnson Nutrition Company North America and Europe 28% Latin America 20% Asia 52% Singapore 1% Mexico 8% manufactures, distributes, and sells infant formulas, children s nutrition, and other nutritional products. Its infant formula products include formulas for routine feeding; solutions formulas for addressing mild feeding problems, such as gas/fussiness, soy formula, lactose intolerance, anti-regurgitation, and cow s milk protein allergy risk; and specialty formula product. It sells its products to mothers, health care professionals, and retailers in approximately 50 countries in North America, Europe, Asia, and Latin America. The company was founded in 1905 and is headquartered in Glenview, Illinois. Yakult Honsha Co. Ltd. Others Europe Yakult Honsha Co., Ltd., a probiotics Pharmaceu - ticals 13% 7% Beverages & Foods 80% Other 38% America 14% Asia and Oceania 18% 3% States 22% China/ Hong Kong 31% Japan 65% company, primarily manufactures and sells food and beverage products. The company offers food and beverages products comprising fermented milk drinks, juices, noodles, etc. through its home delivery and retail store channels. The company was founded in 1935 and is headquartered in Tokyo, Japan. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

115 Revenue segmentation (last reported year) Company Product Geographic Description Diversified food producer Nestlé S.A. Nestlé S.A., together with its subsidiaries, Mondelez International, Inc. Nestlé Nutrition 10% Other 15% Nestlé Waters 8% Asia, Oceania and Africa 20% Europe 17% Americas 30% Information is not available Italy Philippines 2% 3% Mexico 3% provides nutrition, health, and wellness products worldwide. It offers baby foods; cereals chocolate and confectionery, coffee, frozen foods, dairy products, food service products healthcare nutrition; ice cream products, pet care products. The company was founded in 1866 and is headquartered in Vevey, Switzerland. Mondelez International, Inc., through its subsidiaries, manufactures and markets snack food and beverage products worldwide. The company offers biscuits, including cookies, crackers, and salted snacks; chocolates, gums, and candies; powdered beverages and coffee; and cheese and grocery products. The company was formerly known as Kraft Foods Inc. and changed its name to Mondelez International, Inc. in October The company was founded in 2000 and is headquartered in Deerfield, Illinois. Danone Danone produces and distributes food and Early Life Nutrition 20% Waters 18% Medical Nutrition 6% Fresh Dairy Product 56% Rest of World 36% Switzerland 2% Canada 2% Europe Excl. CIS and France 29% Other 82% France 10% UK 3% Brazil 6% Germany 4% USA 26% United States 18% Greater China 7% France 6% CIS & North America 22% Asia- Pacific, Latin America, Middle East, Africa 39% beverage products. The company s divisions include Fresh Dairy Products, Waters, Early Life Nutrition, Medical Nutrition division It has operations in Russia, France, the United States, China, Indonesia, Spain, Mexico, Argentina, the United Kingdom, and Brazil. Danone has a strategic agreement with Starbucks to create and develop a line of Danone-branded fresh dairy products. Danone was founded in 1899 and is based in Paris, France. Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

116 ATTACHMENT 4 ORDINARY SHAREHOLDERS Revenue segmentation (last reported year) Company Product Geographic Description Goodman Fielder Ltd. Goodman Fielder Limited manufactures, markets, and distributes food ingredients, as well as consumer branded food, beverage, Grocery 21% Asia Pacific 15% Dairy 22% Baking 41% Asia Pacific 16% New Zealand 38% Australia 46% and related products. It operates through Baking, Dairy, Grocery, and Asia Pacific divisions. The company s products cover every meal, including breakfast, lunch, dinner, and snacks. It provides fresh and flavoured milk, yogurt, dairy desserts, specialty cheese, and cultured products; spreads and dips, cooking oil, sauces, dressings, vinegar, mayonnaise, flour, pastries, baking ingredients, and baked snacks; and flour, chicken, and snacks, as well as bread, condiments, cake mix, pies, and savouries. Goodman Fielder Limited is based in North Ryde, Australia. Source: Capital IQ, Deloitte Corporate Finance analysis Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide Page

117 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and highquality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's approximately 182,000 professionals are committed to becoming the standard of excellence. About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,700 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte s web site at Member of Deloitte Touche Tohmatsu Limited 2015 Deloitte Corporate Finance Pty Limited Page 52 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Ordinary Shareholders and Financial Services Guide 115

118 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 7 April

119 Financial Services Guide What is a Financial Services Guide? This Financial Services Guide (FSG) provides important information to assist you in deciding whether to use our services. This FSG includes details of how we are remunerated and deal with complaints. Where you have engaged us, we act on your behalf when providing financial services. Where you have not engaged us, we act on behalf of our client when providing these financial services, and are required to give you an FSG because you have received a report or other financial services from us. The person who provides the advice is an Authorised Representative (AR) of Deloitte Corporate Finance Pty Limited (DCF), which authorises the AR to distribute this FSG. Their AR number is included in the report which accompanies this FSG. What financial services are we licensed to provide? We are authorised to provide financial product advice and to arrange for another person to deal in financial products in relation to securities, interests in managed investment schemes, government debentures, stocks or bonds to retail and wholesale clients. We are also authorised to provide personal and general financial product advice and deal by arranging in derivatives and regulated emissions units to wholesale clients, and general financial product advice relating to derivatives to retail clients. Our general financial product advice Where we have issued a report, our report contains only general advice. This advice does not take into account your personal objectives, financial situation or needs. You should consider whether our advice is appropriate for you, having regard to your own personal objectives, financial situation or needs. If our advice is provided to you in connection with the acquisition of a financial product you should read the relevant offer document carefully before making any decision about whether to acquire that product. How are we and all employees remunerated? We will receive a fee of approximately $275,000 exclusive of GST in relation to the preparation of both this report and the report prepared for ordinary shareholders. This fee is not contingent upon the success or otherwise of the proposed conversion of preference shares into non-voting ordinary shares. Other than our fees, we, our directors and officers, any related bodies corporate, affiliates or associates and their directors and officers, do not receive any commissions or other benefits. All employees receive a salary and while eligible for annual salary increases and bonuses based on overall performance they do not receive any commissions or other benefits as a result of the services provided to you. 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Limited for the financial year ended June April 2015 Deloitte Corporate Finance Pty Limited, ABN , AFSL of 550 Bourke Street, Melbourne VIC 3000 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Member of Deloitte Touche Tohmatsu Limited Deloitte Touche Tohmatsu has provided ad-hoc accounting, tax and consulting services to Murray Goulburn Co-operative Co. Limited over the last two years, the fees for which are not material to Deloitte Touche Tohmatsu. None of the services described above were related to the preference share conversion. What should you do if you have a complaint? If you have any concerns regarding our report or service, please contact us. Our complaint handling process is designed to respond to your concerns promptly and equitably. All complaints must be in writing to the address below. If you are not satisfied with how we respond to your complaint, you may contact the Financial Ombudsman Service (FOS). FOS provides free advice and assistance to consumers to help them resolve complaints relating to the financial services industry. FOS contact details are also set out below. The Complaints Officer Financial Ombudsman Services PO Box N250 GPO Box 3 Grosvenor Place Melbourne VIC 3001 Sydney NSW 1220 info@fos.org.au complaints@deloitte.com.au Fax: Tel: Fax: What compensation arrangements do we have? Deloitte Australia holds professional indemnity insurance that covers the financial services provided by us. This insurance satisfies the compensation requirements of the Corporations Act 2001 (Cth). 117

120 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Deloitte Corporate Finance Pty Limited A.B.N AFSL Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia The Directors Murray Goulburn Co-operative Co. Limited Level 15, Freshwater Place, 2 Southbank Boulevard Southbank VIC 3006 DX 111 Tel: Fax: April 2015 Dear Directors Independent expert s report Introduction Murray Goulburn Co-operative Co. Limited (MG) is considering undertaking a capital restructure (the Proposed Capital Restructure), which would involve raising up to $500 million from external investors (the Unitholders) via an initial public offering (IPO) of units (the Units) to be issued by a unit trust (the Unit Trust) listed on the Australian Securities Exchange (ASX). The Proposed Capital Restructure is subject to approval of the ordinary shareholders of MG at an Extraordinary General Meeting (EGM). In preparation for the Proposed Capital Restructure, in early 2015 MG undertook a voluntary selective buyback (the Voluntary Buyback) of B Class and C Class Preference Shares in MG (the Preference Shares) at a price of $1.25 per Preference Share. As a result of the Voluntary Buyback, a total of 27.9 million Preference Shares, accounting for approximately 50% of the B Class Preference Shares and 60% of the C Class Preference Shares, were bought back in January 2015 at a cost of $34.9 million. Subject to the approval of the Proposed Capital Restructure by ordinary shareholders, MG has proposed the conversion of all remaining Preference Shares into non-voting ordinary shares in MG (the Preference Share Conversion). If the Preference Share Conversion is approved, the Preference Shares will be converted into $1.25 in value of non-voting ordinary shares (the Consideration), at a conversion ratio to be determined based on the IPO price of the Units. The board of directors of MG (the Board) has prepared a Capital Structure Bookley (the Capital Structure Booklet) to accompany a Notice of Meeting for the EGM containing the detailed terms of the Preference Share Conversion and an overview of the Preference Share Conversion is provided in Section 1 of our report. Purpose of the report Whilst an independent expert s report in respect of the Preference Share Conversion is not required to meet any statutory obligations, the directors of MG (the Directors) have requested that Deloitte Corporate Finance Pty Limited (Deloitte Corporate Finance) provide an independent expert s report advising whether, in our opinion, the Preference Share Conversion is fair and reasonable to the Preference Shareholders as a whole. We have prepared this report having regard to Australian Securities and Investments Commission (ASIC) Regulatory Guide 111 in relation to the content of expert s reports and ASIC Regulatory Guide 112 in respect of the independence of experts. The Regulatory Guides prescribe standards of best practice in the preparation of independent expert s reports. ASIC Regulatory Guide 111 states that in deciding the appropriate form of analysis for a report, an expert should bear in mind that the main purpose of the report is to adequately deal with the concerns that could reasonably be anticipated of those persons affected by the proposed transaction. This report is to be included in the Capital Structure Booklet to be sent to Preference Shareholders and has been prepared for the exclusive purpose of assisting Preference Shareholders in their consideration of the Preference Share Conversion. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 118

121 thereof, undertakes responsibility to any person, other than the Preference Shareholders and MG, in respect of this report, including any errors or omissions however caused. Basis of evaluation Guidance Regulatory Guide 111 provides guidance in relation to the content of independent expert s reports prepared for a range of transactions. ASIC Regulatory Guide 111 notes that the words fair and reasonable establish two distinct criteria for an expert analysing a transaction, and that a transaction is: fair, when the value of the consideration is equal to or greater than the value of the shares subject to the offer. The comparison must be made assuming 100% ownership of the target company (i.e. including a control premium) reasonable, if it is fair, or, despite not being fair, after considering other significant factors, shareholders should accept the takeover offer, in the absence of any higher bids before the close of the offer. To assess whether the Preference Share Conversion is fair and reasonable to Preference Shareholders as a whole, we have adopted the tests of whether the Preference Share Conversion is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in ASIC Regulatory Guide 111. Fairness We have assessed whether the Preference Share Conversion is fair by comparing the value of a Preference Share with the value of the Consideration, being the value of non-voting ordinary shares into which each Preference Share will be converted. Reasonablness ASIC Regulatory Guide 111 considers an offer to be reasonable if either: the offer is fair despite not being fair, but considering other significant factors, shareholders should accept the offer in the absence of any higher bid before the close of the offer. To assess the reasonableness of the Preference Share Conversion we considered the following significant factors in addition to determining whether the Preference Share Conversion is fair: the historical level of dividends paid to Preference Shareholders the likely implications of the Preference Share Conversion to Preference Shareholders. Definition of value The Preference Shares have been valued at fair market value, which we have defined as the amount at which the Preference Shares would be expected to change hands between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of a Preference Share has not been premised on the existence of a special purchaser. Summary and conclusion In our opinion the Preference Share Conversion is fair and reasonable. In arriving at this opinion, we have had regard to the following factors. The Preference Share Conversion is fair We have assessed whether the Preference Share Conversion is fair by comparing our estimated value of a Preference Share with the value of the Consideration, being the $1.25 in value of non-voting ordinary shares into which each Preference Share will be converted. Page 2 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 119

122 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Set out in the table below is a summary of our findings. Table 1: Fairness assessment AUD per share Unit Estimated value Estimated value of a Preference Share AUD Up to 1.00 Consideration per Preference Share AUD 1.25 Source: Deloitte Corporate Finance analysis As set out above, our estimate of the value of a Preference Share is below the value of the Consideration offered per Preference Share. Accordingly, it is our opinion that the Preference Share Convesrion is fair. Our detailed analysis is set out in Section 3. The Preference Share Conversion is reasonable As the Preference Share Conversion is fair, it is also reasonable. We have noted the following factors. The Preference Shareholders will receive a premium As set out above, our assessed value per Preference Share is below the value of the Consideration offered. As such, under the Preference Share Conversion, Preference Shareholders would realise a premium of $0.25 or 25% over the price at which they can currently trade the Preference Shares. The Preference Share Conversion allows Preference Shareholders to fully participate in the future growth of MG MG is undertaking various capital expenditure programs to increase operational efficiencies through automation and to increase sales of higher-growth and higher-margin products, with the ultimate aim of increasing the farmgate milk price (FMP) (the Growth Initiatives). Historically, Preference Shareholders have received relatively fixed dividends which have not been directly linked to the growth of the business. Dividend payments to Preference Shareholders are entirely at the discretion of the Board, and have historically been affected by downturns in MG s earnings, as evidenced by the dividend decrease in 2009 due to the global financial crisis, however have not increased in times of increased earnings. Should the Preference Share Conversion be successful, the Preference Shareholders would, through their nonvoting ordinary shares, share in the future growth of MG and any future upside in its earnings. The non-voting ordinary shares would receive dividends which would be determined with reference to a profit share mechanism (the Profit Share Mechanism), a mechanism which determines the level of dividends which would be paid at any given milk price, such that a higher (lower) milk price will result in a higher (lower) dividend payment, with the aim of aligning the interests of the shareholder suppliers and Unitholders. Preference Shareholders will own securities which will have a market price and a liquid market Should the Preference Share Conversion not proceed, the Board has stated that Preference Shareholders would be limited to selling their Preference Shares to other Preference Shareholders through a process facilitated by MG at a fixed price of $1.00, hence the liquidity of the Preference Shares would remain low. Should the Proposed Capital Restructure and the Preference Share Conversion proceed, the non-voting ordinary shares received as Consideration will be tradable at the same price as the Units that will be publicly traded on the ASX. Trading in non-voting ordinary shares will be facilitated via an online trading platform, with a market facilitator acting as a market maker, matching transactions on the online platform at prices set by the Units. This mechanism will provide Preference Shareholders with both a market price and with additional liquidity, neither of which Preference Shareholders currently have or would have if the Preference Share Conversion does not occur. Page 3 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 120

123 Simplifies the MG capital structure MG currently has three classes of shares: ordinary shares (which can be converted into non-voting shares), B Class Preference Shares and C Class Preference Shares. The Preference Share Conversion, if successful, will result in no outstanding preference shares. This will simplify MG s share structure which will result in MG management dedicating less time and resources toward administering and maintaining these classes of shares. The ATO does not deem the Preference Share Conversion a capital gains tax event Preliminary tax advice received by MG suggests that, based on the current structure of the Preference Share Conversion, it will not constitute a capital gains tax event. We note that this advice is preliminary and general in nature. Preference Shareholders should consult their financial and tax advisers to consider the impact of this transaction on their individual financial and tax circumstances. Rights upon winding up will no longer be senior to those of ordinary shareholders In the event of a wind-up of MG, Preference Shareholders have the right to repayment of the Paid Up Capital in priority to ordinary shareholders. Should the Preference Shares be converted into non-voting ordinary shares their rights on winding up will no longer have priority to those of other ordinary shareholders, although they will have equal rights to participate in any surplus profits or capital, to which Preference Shareholders would have no entitlement. Additional exposure to downside risks of MG By converting their Preference Share interest in MG into ordinary non-voting shares, Preference Shareholders will be exposed to the business risks of the MG business to a greater extent. We note that Preference Shareholders already participate in the downside risk of MG, albeit to a lesser extent than ordinary shareholders, evident by the decrease in dividend distributions in 2009 due to weaker commodity prices as a result of weaker demand during the global financial crisis. Key risks that ordinary shareholders would be more exposed to include, but are not limited to: commodity prices foreign exchange movements general economic conditions competitor actions and responses risks associated with the Growth Initiatives. We make reference to Fonterra, the most comparable listing in the milk industry in recent history although the majority of Fonterra s product mix is commodity based whereas less than 40% of MG s product mix is commodity based. Fonterra s share price, as at 18 February 2015, was 13.3% lower (on a dividend adjusted basis) than the closing share price on the day of its IPO (30 November 2012). Over the same period the New Zealand Exchange (NZX) 50 increased by 41.5%. Falling milk commodity prices and declining returns on investment have been factors contributing to its performance since listing. Notwithstanding, we note that the Fonterra structure is not directly comparable to that of MG, in particular, the Profit Share Mechanism of MG which aims to align the interests of farmers and shareholders is not present in the Fonterra structure. Franking of dividends Should the Proposed Capital Restructure be approved, MG will continue to operate in line with the co-operative principles which underpin its constitution. Currently MG has access to certain elements of the relevant tax legislation that apply to co-operatives, which allow it to claim tax deductions for unfranked dividends. As a result of the continued growth of its business, MG expects that it may no longer have the ability to claim a tax deduction for unfranked dividends in the future. As a consequence MG will pay more tax at the corporate level, however, shareholders will receive franked dividends, and therefore benefit from franking credits. MG expects that this will have no impact on total shareholder returns. Page 4 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 121

124 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Opinion In our opinion, the Preference Share Conversion is fair and reasonable to Preference Shareholders as a whole. An individual shareholder s decision in relation to the Preference Share Conversion may be influenced by his or her particular circumstances. If in doubt the shareholder should consult an independent adviser, who should have regard to their individual circumstances. This opinion should be read in conjunction with our detailed report which sets out our scope and findings. Yours faithfully Stephen Reid Rachel Foley-Lewis Authorised Representative Authorised Representative AR number: AR number: Page 5 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 122

125 Glossary Reference Definition AFSL APESB AR ASIC ASX AUASB AUD β BBSW Board bps CAGR Capital Structure Booklet CAPM Consideration CPI Deloitte Corporate Finance Directors EGM EMRP EU FAO FICS FMP Fonterra FSG FY Growth Initiatives Hard Cap IPO Kd K e Kgms MG NPAT NTA NZX OECD Australian Financial Services Licence Accounting Professional and Ethical Standards Board Limited Authorised Representative Australian Securities and Investments Commission Australian Securities Exchange Auditing and Assurance Standards Board Australian dollars Beta Bank bill swap rate The board of directors of MG Basis points Compound Annual Growth Rate The Capital Structure Booklet Memorandum to accompany the notice of meeting Capital Asset Pricing Model $1.25 of value of non-voting ordinary shares to be issued as part of the Preference Share Conversion, at a conversion ratio to be determined based on the IPO price of the Units Consumer Price Index Deloitte Corporate Finance Pty Limited The Directors of MG Extraordinary General Meeting Equity Market Risk Premium European Union Food and Agriculture Organization Financial Industry Complaints Service Farm gate milk price Fonterra Co-operative group Financial Services Guide Financial year Capital expenditure programs with the ultimate aim of increasing the farm-gate milk price Hard cap on ownership of 0.5% of the total outstanding shares on issue Initial Public Offering Cost of debt capital Cost of equity capital Kilogram of milk solids Murray Goulburn Co-Operative Co. Limited Net profit after tax Net tangible assets New Zealand Exchange Organisation for Economic Co-operation and Development Paid up capital The cost of acquiring an ordinary share in MG of $1.00. Page 6 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 123

126 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Reference Definition PDS Preference Shares Preference Share Conversion Profit Share Mechanism Proposed Capital Restructure RBA R f R m Saputo Share Standard Share Off-take UHT Unit Trust Unitholders Units Voluntary Buyback WACC WCB WMP Product Disclosure Statement B Class and C Class Preference Shares in MG Proposed conversion of remaining Preference Shares into non-voting ordinary shares in MG Mechanism which facilitates the determination of the level of dividends which would be paid at any given milk price, such that a higher (lower) milk price will result in a higher (lower) allocation of profit to dividends, with the aim of aligning the interests of the shareholder suppliers and Unitholders The capital restructure currently being considered by MG, which would include raising up to $500 million from the Unitholders via an IPO of the Units to be issued by the Unit Trust listed on the ASX Reserve Bank of Australia Risk free rate of return Expected return on the market portfolio Saputo Incorporated Share standard is set at one share per kgms supplied Compulsory off-take of additional shares by supplier shareholders, in line with their level of annual milk production, up to the Share Standard for suppliers who are under the Share Standard. For suppliers over the Share Standard the off-take will be optional Ultra high temperature processed milk The trust through which the Units are issued in the IPO Unitholders in the Unit Trust The units to be issued by the Unit Trust in the IPO Voluntary selective buyback of Preference Shares Weighted average cost of capital Warrnambool Cheese And Butter Factory Whole Milk Powder Page 7 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 124

127 Contents 1 Overview of the Preference Share Conversion 9 2 Profile of MG 10 3 Valuation of MG Preference Shares 20 Appendix A: Context to the Report 24 Appendix B: Valuation methodologies 26 Appendix C: Discount rate 27 Page 8 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 125

128 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS 1 Overview of the Preference Share Conversion 1.1 Summary Following the Voluntary Buyback in early 2015, and subject to the implementation of the Proposed Capital Restructure, MG has proposed the conversion of all remaining Preference Shares into non-voting ordinary shares in MG. If the Preference Share Conversion is approved, the Preference Shares will be converted into $1.25 of value in non-voting ordinary shares, at a conversion ratio to be determined based on the IPO price of the Units. The non-voting ordinary shares into which the Preference Shares would be converted will receive the same dividend distributions as ordinary shares, with the only difference being that they will have no voting rights. 1.2 Key conditions of the Preference Share Conversion The Preference Share Conversion is subject to various conditions, the most significant being: approval of the Proposed Capital Restructure by ordinary shareholders implementation of the Proposed Capital Restructure by the Board as a change to the constitution of MG will be required and will affect the rights of Preference Shareholders, approval by 75% of each class of shareholder present at the EGM is required. 1.3 Intentions after the Preference Share Conversion MG has stated that its intention in undertaking the Preference Share Conversion is to give the remaining Preference Shareholders the opportunity to participate in the new capital structure of MG which will be implemented if the Proposed Capital Restructure is approved. If the Preference Share Conversion is approved, all Preference Shares will be converted to non-voting ordinary shares. If the Preference Share Conversion is not approved, there will be no change to the rights attaching to the Preference Shares. As per the existing mechanism, Preference Shares will only be able to be traded through an MG-facilitated process for $1.00 per share, as stated in MG s letter to suppliers on 26 August 2014: If the capital restructure does not proceed, the B and C class Preference Shareholders who did not sell their shares would retain their shares in the structure that exists today. As such, these shares could only be sold to other B and C class Preference Shareholders through an MG-facilitated process for $1.00 per share. Importantly, the Board may look to reduce the dividends on these shares to a level that is more in line with its cost of funding, and therefore there is no certainty around the level of future dividends. Management of MG has advised that the cost of funding referred to in the above paragraph relates to the cost of debt funding, which is currently in the range of 4% to 5%. Page 9 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 126

129 2 Profile of MG 2.1 Overview of operations MG is a co-operative, 100% controlled by dairy farmers, with over 2,500 supplier shareholders. As a dairy cooperative, the primary objectives of MG are to advance the interests of its supplier shareholders, through the acquisition and distribution of supplier shareholder milk and the provision of other services which the Board may consider as being in the interests of MG and its suppliers. The company opened its first co-operative factory in Following this, MG continued to acquire farming operations domestically, before expanding internationally through the acquisition of an interest in its first processing facility in Qingdao in Today, MG is Australia s largest dairy foods company, producing a range of ingredient and nutritional products, supplying the food service industries globally and selling consumer products nationally under the flagship Devondale brand. MG s products are sold in over 30 countries globally. For the year ended 30 June 2014, MG produced 3.4 billion litres of milk and accounted for approximately 37% of Australia s milk production by volume. The following table summarises the key statistics of MG s operations for the year ended 30 June Table 2: Operational summary of MG Units Details Key metrics for the year ended 30 June 2014 Annual milk volume 1 Billion litres 3.4 Annual production of dairy products Tonnes 784,299 Final available farm-gate price (as at 30 June 2014) Per kg of milk solids $6.81 Source: Deloitte Corporate Finance analysis Note: 1. Includes MG s majority owned subsidiary, Tasmanian Dairy Products Company Limited For the year ended 30 June 2014, approximately 77% of MG s export revenue was generated in Asia, as shown in Figure 2 below. Approximately 51% of MG s milk production was exported during the year ended 30 June 2014, predominantly to Asia. Figure 1: Total revenue by market Figure 2: Export revenue by market 4% 12% 51% 49% 7% 77% International Australia Asia Middle East/Africa Americas Other Source: Deloitte Corporate Finance analysis, Management Source: Deloitte Corporate Finance analysis, Management Page 10 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 127

130 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS 2.2 Company history An overview of the recent history of MG is provided in Figure 3 below. Figure 3: MG s company history 2006 Acquired the Classic Foods business at Edith Creek in Tasmania in May Opened MG Qingdao factory in China in May through a 51% interest in a joint venture with a Chinese partner Reported significant growth in profit after tax to $93.2 million from $21.7 million for FY2008 (which was affected by the global financial crisis), boosted by strong export prices 2009 Entered into a joint venture with fresh food company Danone in July to market yoghurt Entered negotiations to acquire Warrnambool Cheese & Butter Factory (WCB) for approximately $160 million in January. MG acquired 4 million shares in WCB for $15.0 million Closed Leitchville cheese site in February, after eight years of drought in the region Announced that MG had withdrawn its takeover for WCB in June Announced $100 million in cost savings through redundancies affecting both processing and head office staff Announced a 76.0% interest in the Tasmanian Dairy Products joint venture in June Acquired the joint venture partner s 49.0% interest in MG Qingdao increasing MG s ownership to 100% in March Acquired an additional 2.3% stake in WCB for AUD 5.7 million in cash in April increasing MG s share to 14.5% of WCB Announced that it will build two new milk processing facilities in Sydney and Melbourne in July WCB acquired by Saputo in February 2014, resulting in MG selling its 17.7% interest in WCB Announced that MG is considering a partial public listing as a means of raising capital in November Announced three new capital projects worth a combined $126 million ($74 million, $38 million and $14 million in cheese, infant nutrition and dairy beverages, respectively) in May Announced a record high available milk price for FY2014 of $6.81 per kgms 2014 Mandatory buy-back of 100% of A-class preference shares completed Voluntary buyback of 49.84% and 59.62% of B-class and C-class preference shares, respectively. This was completed in January 2015 Source: MG Announcements, Deloitte Corporate Finance analysis, ASX announcements, CapitalIQ 2.3 Shareholding structure As a co-operative, MG is owned solely by dairy farmers who either currently supply milk, or formerly supplied milk, to the co-operative. Over the past year, MG has undertaken a simplification of its shareholding structure and has facilitated the following share buybacks to date: the selective capital reduction and cancellation of all A-class preference shares for $1.25 per share completed in June 2014 for a total of $18.5 million the buyback of 49.84% B-class preference shares and 59.62% C-class preference shares on issue for $1.25 per share at a total cost of $34.9 million Page 11 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 128

131 Following the completion of these share transactions there are now three classes of shares outstanding, as shown in the following table. Table 3: MG s shareholder classes Term Ordinary shares B-class Preference Shares C-class Preference Shares Description Ordinary shares Non-cumulative, nonredeemable preference share Type of shareholders Existing suppliers Retired farmers who supplied MG for less than 10 years or had less than 10,000 shares. Alternatively, shareholders who left MG to go to another processor Non-cumulative, nonredeemable preference share Retired farmers who supplied MG for greater than 10 years and had greater than 10,000 shares and did not leave MG to supply milk to another processor Number of shareholders 2, Average shareholding 99,846 15,619 41,250 Shares outstanding million 8 million 17 million Percentage of total shareholding 91.9% 2.5% 5.6% Voting rights (at AGM) Yes No No Dividend ranking Below Preference Shares Senior to ordinary shares but equal to C class shares Senior to ordinary shares but equal to B class shares Dividend At the discretion of the Board At the discretion of the Board At the discretion of the Board Franking credits Dividend generally not franked Dividend generally not franked Dividend generally not franked Pro-rata share of surplus 2 Yes Yes Yes Winding up The right to participate in the distribution of surplus assets in any liquidation of MG. This right is subordinate to the rights of preference shareholders. The right to repayment of $1 per share upon any liquidation of MG. The right to repayment is senior to ordinary shares and equal to C-class preference shares. The right to repayment of $1 per share upon any liquidation of MG. The right to repayment is senior to ordinary shares and equal to B-class Preference Shares. Source: Management Note: 1. Figures may not add due to rounding 2. These shares carry a right to a pro-rata share of any surplus earnings determined by the Board in accordance with the Constitution 3. Ordinary Shares may be converted into non-voting shares (and vice versa) by the Board in certain circumstances. 2.4 Products MG has three main operating segments Ingredients and Nutritionals, Dairy Foods, and Other, which includes MG Trading and MG s other joint ventures and subsidiaries. Each of these are described briefly below Ingredients and Nutritionals The Ingredients and Nutritionals segment supplies a wide range of ingredients to consumers both domestically and internationally. The products produced by this segment include milk powders, whey powders, cheese products, lactose, anhydrous milk fats, specialty milk fats, speciality milk proteins, caseinates, bioactives including lactoferrin, natural milk minerals and nutritional products, including infant formula Dairy Foods This segment includes retail brands marketed by MG or manufactured under contract packaging arrangements with major retailers, food service wholesalers or other food manufacturers both domestically and internationally. The brands in this channel include: Devondale: the only brand sold in Australia that offers a full suite of dairy products, including milk (daily pasteurised and long life milk), spreads and cheese marketed. Devondale is marketed both in Australia and overseas Liddells: lactose free cow s milk brand, including long-life milk, long-life cream and yoghurt Table Cove: a milk brand which produces full cream, skim and reduced fat milk in south eastern Australia Page 12 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 129

132 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Ascend: a sports protein brand which includes products containing unique bioactive proteins Kiewa Country: produces modified and flavoured milk for the Victorian alpine regions Cobram: produces a large range of cheese (bulk and retail), whey powder, whey protein concentrate, whey protein isolate, lactose, specialty whey proteins, infant formula and specialty ingredients Proform: meal replacement and supplement based on milk powder MG is a large supplier in the supermarket segment and has developed its market position through long-term retail relationships Other MG Trading The MG Trading segment provides its milk suppliers and other rural customers with farm inputs and services. MG Trading operates 25 stores and five fertiliser depots servicing most of south-east Australia. MG Trading stocks a wide range of farm inputs including fodder, feed, fertiliser, farm chemicals, animal health products, dairy hygiene products and work and safety wear. MG Qingdao MG operates in China through MG Qingdao Dairy which was established as a joint venture with a local partner in MG Qingdao produces a range of infant nutrition products under the Natrastart brand which are marketed and distributed throughout China. MG acquired the 49.0% interest in MG Qingdao that it did not already own in March 2013 and it now operates as a wholly owned subsidiary of MG. Joint ventures MG has diversified its operations through joint ventures. MG currently participates in the joint ventures set out in the following table. Table 4: MG s joint ventures Joint venture Operations overview Markets Interest Danone Murray Goulburn Dairy Technical Services Food Laboratories Tasmanian Dairy Products Source: Management Markets yoghurt and other fresh dairy products Provides independent analytical services to meet food safety needs Dairy processing which produces high quality milk powders and dairy fat products Australia 50.0% Australia 25.3% Australia 76.0% 2.5 Growth initatives MG intends to invest up to approximately $600 million over the next five years on the Growth Initiatives, with the aim of connecting MG to key Asian growth markets, which the Board believes will enable MG to sell higher value-add products and increase the farm-gate milk price it pays to suppliers. The Board also considers that through higher returns to suppliers, the Growth Initiatives may encourage dairy farmers to increase investment in their production capacity. Should the Proposed Capital Structure not proceed, the Board has stated the alternative funding mechanism for these growth initiatives would be through debt markets, however it is possible that some or all of the Growth Initiatives would need to be deferred or foregone altogether. We describe below the three key projects MG is undertaking as part of the Growth Initiatives. Page 13 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 130

133 Cheese MG intends to spend approximately $125 million to $145 million over the coming one to two years on expanding production capacity in the Cheese category. MG intends to expand its processing operations into private label and branded cheese slices/snacking due to the higher expected growth rates in these segments compared to block varieties. The new processing facilities are expected to be located in Cobram in Victoria. MG s strategy is to gain operational efficiencies through processing cheese products in a variety of ways (e.g. shredded and snack varieties) and distributing these to Asian markets as well as through domestic distribution lines such as those in its grocery segment. UHT milk MG intends to spend approximately $165 million to $190 million over the coming one to five years expanding production capacity in the UHT category. Australia is the fourth largest exporter of UHT into China, supplying 10% of total imports, behind France, New Zealand and Germany 1. MG s strategy is to increase its production capacity, through a staged investment process, adding processing capacity and the ability to produce a wider range of bottling formats. Nutritionals MG intends to spend approximately $260 million to $300 million over the coming one to five years expanding production capacity in the Nutritionals category. MG intends to construct and commission a new, stand-alone infant formula facility on the current Koroit site in Victoria. The plant will be designed to produce growing-up milk powder, follow-on powder, infant formula, nutritional powder and whole milk powders primarily for the export markets in China, Indonesia and other Asian countries. The investment is expected to commence in the next twelve months subject to signing an offtake agreement with a major global food customer. 1 Beijing Orient Agribusiness Consultants Ltd, China Import Dairy August 2014 Page 14 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 131

134 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS 2.6 Financial performance The following table sets out the statutory audited consolidated statements of financial performance for MG for the financial years ended 30 June 2012, 2013 and Table 5: Summary of financial performance ($ millions) FY2012 FY2013 FY2014 Trading revenue 2, , ,916.5 Revenue growth 3.50% 0.80% 22.30% Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA margin 3.51% 4.93% 3.75% Depreciation and amortisation (52.9) (54.1) (53.2) Earnings before interest and tax (EBIT) EBIT margin 1.28% 2.66% 1.93% Net finance costs (22.2) (24.4) (24.0) Tax (paid)/benefit 6.4 (4.1) (3.0) Net profit after tax (NPAT) NPAT margin 0.61% 1.46% 1.00% Dividends Ordinary shareholders A Class Preference Shareholders B Class Preference Shareholders C Class Preference Shareholders Total dividends paid Source: Deloitte Corporate Finance analysis, MG annual accounts We note the following in relation to the statements of financial performance shown above: revenue grew by 22% to $2.9 billion in FY2014 driven primarily by an increase in commodity prices MG s milk supply, grew by 8% in FY2014, despite flat production volumes for the Australian dairy industry as a whole. This was partly a result of MG s entry into New South Wales milk market with the first 10 months of operations resulting in the collection of approximately100 million litres from new suppliers Page 15 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 132

135 distribution, administration and marketing costs comprise the majority of operational expenses aside from milk payments. A break-down of operational expenses for FY2014 is shown in Figure 4 below. Figure 4: Operational expenses Distribution expenses Selling and marketing expenses Administration expenses Finance costs Other expenses Share of loss of associates Source: MG FY2014 Annual Report NPAT was $29.3 million in FY2014, down from $34.9 million in FY2013 partly due to higher costs of goods sold resulting in a decline of gross profit from 13.3% to 11.8%. Total payments to suppliers (excluding dividends) represented 61% of sales in FY2014, compared to 50% of sales in FY2013 in FY2014, the Board declared an unfranked final dividend of $0.08 per share for ordinary shares and $0.05 per share for B Class and C Class Preference Shares. For ordinary shareholders, this equated to a payment of approximately $0.09 per kgms. Figure 5 below shows the historical dividend payments made to ordinary and preference shareholders for the years FY2004 to FY2014 Figure 5: Historical dividends declared in relation to each financial year FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Ordinary dividend A-class dividend B-class dividend C-class dividend Source: Management Note: 1. Dividends shown above relate to dividends declared in relation to each financial year. Payment of these dividends has generally been made in September of the following financial year. 2. The selective capital reduction of Acxlass preference Shares was completed in June As part of the buyback, a deemed dividend of $0.25 was paid to A-class shareholders. No other dividend was announced or paid to A Class Shareholders during FY2014. Page 16 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 133

136 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS for FY2014, MG paid a final milk price to its suppliers of $6.81 per kgms on an available weighted average basis, a 37% increase from FY2013. The figure below shows the historical milk price paid to farmers for FY2010 to FY2014. Figure 6: Historical available milk price paid Source: MG annual accounts Page 17 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 134

137 2.7 Financial position The following table sets out the consolidated statements of financial position for MG as at 30 June 2012, 2013 and Table 6: Summary of financial position ($ millions) FY2012 FY2013 FY2014 Cash Receivables Inventories Other Total current assets Receivables Investments accounted for using the equity method Other financial assets Property, plant & equipment Intangible assets Other Total non-current assets Total assets 1, , Payables Borrowings Provisions Other Total current liabilities Payables Borrowings Provisions Deferred tax liabilities Total non-current liabilities Total liabilities ,017.5 Net assets Source: Deloitte Corporate Finance analysis, MG annual accounts Note: 1. Other current assets relate to current tax assets and derivative financial assets 2. Other current liabilities relate to derivative financial liabilities We note the following in relation to the statements of financial position presented above: receivables grew from $442.2 million in FY2013 to $536.3 million in FY2014 driven predominantly by an increase in sales, especially export sales the other current assets of $12.1 million as at 30 June 2014 includes prepayments of $5.2 million and deferred capital raising costs of $3.4 million on 2 May 2014, MG announced three new capital projects worth a combined $126 million, which are currently not recognised in the property plant and equipment balance The projects will be located at MG s Page 18 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 135

138 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS existing sites in Victoria and Tasmania and will be delivered over a 12 to 18 month period, and are in addition to the Growth Initiatives. The investment will comprise of: o $74 million to build a cheese cut and wrap facility at MG s Cobram site to serve Australian and Asian consumer and food service markets o $38 million to increase production capacity of infant nutrition products at Koroit and Cobram to serve growing international infant nutrition markets o $14 million to install and commission a flexible small format cup and bottle filling line to commercialise a range of dairy beverage products for consumer markets in Australia and Asia. intangible assets as at 30 June 2014 related to goodwill ($12.1 million) and brand names ($4.0 million). Goodwill increased by $6.8 million in FY2012 as a result of MG s acquisition of a 80.1% share in Tasmanian Dairy Products all borrowings are recorded at amortised cost. Bank loans and private placement senior notes are secured by negative pledge agreements between the parent entity and its financiers. The table below shows the financing arrangements for MG as at 30 June 2012, 2013 and Table 7: Summary of MG s borrowings ($ millions) Audited Actual FY2012 Audited Actual FY2013 Audited Actual FY2014 Current borrowings Bank loans Private placement senior notes Total current borrowings Non-current borrowings Bank loans Private placement senior notes Total non-current borrowings Total borrowings less Cash (34) (12) (14) Net debt Unused credit facilities Source: Deloitte Corporate Finance analysis, MG annual accounts Note: 1. Total borrowings include debt held by investments in associates 2. Figures are subject to rounding Page 19 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 136

139 3 Valuation of MG Preference Shares 3.1 Introduction We have assessed whether the Preference Share Conversion is fair by comparing the value of a Preference Share with the value of the ordinary shares into which it will be converted should the Preference Share Conversion be approved. For the purpose of our opinion fair market value is defined as the amount at which the Preference Shares would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither being under a compulsion to buy or sell. We have not considered special value in this assessment. 3.2 Selection of valuation methodologies We have assessed the value of the Preference Shares with reference to both historical trading prices in the Preference Shares and the capitalisation of dividends method. Refer to Appendix B for a detailed description of the various valuation methodologies which can be adopted in valuing corporate entities and businesses. In selecting the methodologies used to value the Preference Shares, we have considered the following: there has historically been a set price for transactions in the Preference Shares of $1.00 per share, which the Board has indicated will continue if the Preference Share Conversion is not approved the majority of the Preference Shares on issue were bought back in January 2015 under the Voluntary Buyback at a price of $1.25 per share the historical dividends paid to Preference Shareholders have been relatively stable over time. With the exception of 2009, during the global financial crisis, dividends paid on B Class Preference Shares have been $0.05 per share per annum, while dividends on C Class Preference Shares were $0.08 per share per annum until 2014, when dividends were reduced to $0.05 per share, in line with dividend payments on B Class Preference Shares required rates of return on similar financial instruments. While there are few financial instruments that are truly comparable to the Preference Shares for which financial and trading information is publicly available, investors in the Preference Shares are likely to require a rate of return equivalent to a security which lies between debt and ordinary equity, for which more data is available with the exception of the period during the global financial crisis, there does not appear to have been any direct link between the earnings or cash flows of MG and the dividends paid to Preference Shareholders, making the use of either a capitalisation of underlying maintainable earnings approach or a discounted cash flow approach inappropriate. Having considered the factors above, we have selected historical share trading and the capitalisation of dividends methodologies to estimate the value of the Preference Shares. 3.3 Valuation of Preference Shares Share trading If the Proposed Capital Restructure does not take place then Preference Shareholders will only be able to realise the capital value of their shares by selling them to other farmers through a process facilitated by MG at a price determined by the Board ($1.00 per share), as described in MG s letter to suppliers on 26 August 2014: If the capital restructure does not proceed, the B and C Class Preference Shareholders who did not sell their shares would retain their shares in the structure that exists today. As such, these shares could only be sold to other B and C Class Preference Shareholders through an MG-facilitated process for $1.00 per share. The historical and expected transactions in Preference Shares if the Preference Share Conversion does not occur, at the Board determined price of $1.00 per share, provides evidence of the market value of the Preference Shares. Page 20 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 137

140 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS We have also considered other recent transactions in the Preference Shares of MG, which support a price at or below $1.25 per Preference Share. In particular we make reference to: the Voluntary Buyback at a price of $1.25 per share in January A total of 27.9 million Preference Shares were transacted at a total value of $34.9 million, representing 50% of total B Class and 60% of total C Class Preference Shares the A Class preference share cancellation at a price of $1.25 per share in June We note that A Class Preference Shares had a fixed guaranteed per share entitlement of $0.08 as opposed to the dividends on the B Class and C Class Preference Shares which are entirely at the Board s discretion, and expected to be lower than $0.08 (given C Class Preference Share dividends have been brought in line with B Class Preference Shares). For these reasons, we would expect B Class and C Class Preference Shares to trade at a discount to A Class Preference Shares The capitalisation of dividends method The capitalisation of dividends method estimates fair market value by discounting future cash flows to their net present value. The key assumptions and assessed value of the Preference Shares based on the capitalisation of dividends method are summarised in the following table. Table 8: Valuation of a Preference Share using the capitalisation of dividends methodology Unit Low High Future dividends $ Discount rate (low end of our selected range) % 8.5% 8.5% Terminal growth rate % 0.0% 0.0% Value of a Preference Share $ Source: Deloitte Corporate Finance analysis Future dividends The future dividend projections consist of nominal cash flows attributable to B Class and C Class Preference Shares. In estimating the likely future maintainable Preference Share dividend distributions, we have undertaken the following: analysis of the historical dividend payments on B Class and C Class Preference shares for the period from FY04 to FY14, as presented in Section 2.6. In particular, we note the following: o dividends on C Class Preference Shares were reduced in FY2009 due to the impact of weaker commodity prices during the global financial crisis o historically the B Class Preference Shares have received lower distributions than C Class Preference Shares, as B Class Preference Shareholders are predominately farmers who either hold fewer than 10,000 shares, supplied MG for a period of less than 10 years or ceased supplying MG in order to supply another processor. However, in FY14 the Board reduced the C Class Preference Share dividends to be in line with dividends paid on B Class Preference Shares. The Board has stated that in its view, an 8% distribution is too high relative to the cost of funding the expected future capital requirements of MG, including the Growth Initiatives. In addition, the decrease in the dividends paid on C Class Preference Shares simplified the buyback of Preference Shares that occurred in January 2015 discussions with MG in relation to prospects for future dividends if the Proposed Capital Restructure is not approved. As detailed in Section 1.3, the Board has announced that future Preference Share dividends are uncertain and may reduce to a level that is more in line with MG s cost of debt funding, which is currently in the range of 4.0% to 5.0%. This implies a dividend in the range of $0.04 to $0.05 a review of MG s constitution in relation to preference share entitlements as detailed in Section 2.3. We highlight that Preference Share dividends are non-cumulative and are determined solely at the discretion of the Board with no priority to dividends over ordinary shareholders Page 21 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 138

141 Based on the factors above we have selected a dividend distribution in the range of $0.04 to $ Discount rate The discount rate used to equate the future cash flows to a present value reflects the risk adjusted rate of return demanded by a hypothetical investor. We estimate that a hypothetical investor would require a return of at least 8.5% to discount the future dividends on the Preference Shares to their present value. In selecting the discount rate for the Preference Shares we considered our estimated cost of equity for MG, our estimated long term cost of debt for MG, and the relative risk profile of the Preference Shares compared to the debt and equity of MG, as set out in Appendix C. Terminal growth rate We have assumed a nominal long-term growth rate of nil, based on historical dividends paid on the Preference Shares. Capitalisation of dividends conclusion The value of the Preference Shares derived from the capitalisation of dividends method is summarised in Table 8. Based on the minimum required discount rate range of 8.5% and a dividend in the range of $0.04 to $0.08, the value of a Preference Share derived from the capitalisation of dividends method is in the range of $0.46 to $0.92. We have also calculated the value of a Preference Share based on higher and lower discount rates and dividend rates, as shown in the table below. We are of the view that it is unlikely that a rational investor would demand a return of lower than 8.5%, however, under no scenario shown below is the value of a Preference Share using the capitalisation of dividends method greater than $1.00. Table 9: Discount rate and dividend rate sensitivity Discount rate % 9.5% 9.0% 8.5% 8.0% Dividend (cents per share) Source: Deloitte Corporate Finance analysis In assessing the reasonableness of our conclusion, we have also considered the sensitivity of the value of a Preference Share to the dividend distribution and dividend growth rates assuming a discount rate of 8.5%, which is at the low end of our discount rate range, as set out in the following table. Table 10: Dividend distribution and growth rate sensitivity (discount rate 8.5%) Dividend growth rate % 0.5% 1.0% 1.5% 2.0% 2.5% Dividend (cents per share) Source: Deloitte Corporate Finance analysis 2 We understand that dividend payments typically occur in September/October of each year, as such, we have assumed a payment date of 30 September of each year Page 22 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 139

142 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS We note the following in relation to the sensitivity analysis presented above: the only scenario in which the Preference Shares would have a value over $1.25 per share is if dividends were $0.08 per share and the dividend growth rate were forecast to be 2.5% p.a. There is no history of MG increasing dividends paid on the Preference Shares, the Board decreased the level of C Class preference share dividends in FY14 and has indicated that it may look to reduce the level of dividends paid on the Preference Shares from the current level of $0.05 per share if the Preference Share Conversion does not proceed. Accordingly, we do not consider this to be a reasonable valuation outcome at a dividend of $0.04, a discount rate of 3.2% would be required to achieve a value per share of $1.25. At a dividend of $0.08, a discount rate of 6.3% would be required to achieve a value per share of $1.25. These are far below the low end of our selected discount rate range for the Preference Shares of 8.5% Cross-check As a cross-check to our estimated value of a Preference Share, we have also considered the return of capital to which Preference Shareholders would be entitled if MG were to be wound up at any time in the future. Under this scenario, Preference Shareholders would have priority over Ordinary Shareholders in relation to the repayment of the paid-up capital of $1.00 per share, but no right to any surplus capital over and above that amount. Given the time value of money, the present value of Preference Shareholders right to repayment of paid-up capital upon winding up of MG in the future is less than $1.00 per Preference Share. 3.4 Overall conclusion Based on the historical share trading and the capitalisation of dividends approaches, we estimate the value of the Preference Shares to be up to $1.00 per share. Page 23 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 140

143 Appendix A: Context to the Report Individual circumstances We have evaluated the Preference Share Conversion for Preference Shareholders as a whole and have not considered the effect of the Preference Share Conversion on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Preference Share Conversion from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Preference Share Conversion is fair and reasonable. If in doubt investors should consult an independent adviser, who should have regard to their individual circumstances. Limitations, qualifications, declarations and consents The report has been prepared at the request of the Directors of MG and is to be included in the Capital Structure Booklet to be given to Preference Shareholders in relation to the Preference Share Conversion. Accordingly, it has been prepared only for the benefit of the Directors and those persons entitled to receive the Capital Structure Booklet in their assessment of the Preference Share Conversion outlined in the report and should not be used for any other purpose. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the Directors, Preference Shareholders and MG, in respect of this report, including any errors or omissions however caused. Further, recipients of this report should be aware that it has been prepared without taking account of their individual objectives, financial situation or needs. Accordingly, each recipient should consider these factors before acting on the Preference Share Conversion. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited. The report represents solely the expression by Deloitte Corporate Finance of its opinion as to whether the Preference Share Conversion is fair and reasonable. Deloitte Corporate Finance consents to this report being included in the Capital Structure Booklet. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Deloitte Corporate Finance has relied upon the completeness of the information provided by MG and its officers, employees, agents or advisors which Deloitte Corporate Finance believes, on reasonable grounds, to be reliable, complete and not misleading. Deloitte Corporate Finance does not imply, nor should it be construed, that it has carried out any form of audit or verification on the information and records supplied to us. Drafts of our report were issued to MG management for confirmation of factual accuracy. In recognition that Deloitte Corporate Finance may rely on information provided by MG and its officers, employees, agents or advisors, MG has agreed that it will not make any claim against Deloitte Corporate Finance to recover any loss or damage which MG may suffer as a result of that reliance and that it will indemnify Deloitte Corporate Finance against any liability that arises out of either Deloitte Corporate Finance s reliance on the information provided by MG and its officers, employees, agents or advisors or the failure by MG and its officers, employees, agents or advisors to provide Deloitte Corporate Finance with any material information relating to the Preference Share Conversion. Deloitte Corporate Finance holds the appropriate Australian Financial Services licence to issue this report and is owned by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte Corporate Finance principally involved in the preparation of this report were Stephen Reid, B.Ec, M.App.Fin.Inv., CA, F.Fin and Rachel Foley-Lewis, B.Com., CA, F.Fin. Each has many years experience in the provision of corporate financial advice, including specific advice on valuations, mergers and acquisitions, as well as the preparation of expert reports. Consent to being named in disclosure document Deloitte Corporate Finance Pty Limited (ACN ) of 550 Bourke Street, Melbourne, VIC 3000 acknowledges that: MG proposes to issue a Capital Structure Booklet in respect of the Preference Share Conversion the Capital Structure Booklet will be issued in hard copy and be available in electronic format it has previously received a copy of the draft Capital Structure Booklet for review Page 24 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 141

144 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS it is named in the Capital Structure Booklet as the independent expert and the Capital Structure Booklet includes its independent expert s report in Attachment 5 of the Capital Structure Booklet. On the basis that the Capital Structure Booklet is consistent in all material respects with the draft Capital Structure Booklet received, Deloitte Corporate Finance Pty Limited consents to it being named in the Capital Structure Booklet in the form and context in which it is so named, to the inclusion of its independent expert s report in Attachment 5 of the Capital Structure Booklet and to all references to its independent expert s report in the form and context in which they are included, whether the Capital Structure Booklet is issued in hard copy or electronic format or both. Deloitte Corporate Finance Pty Limited has not authorised or caused the issue of the Capital Structure Booklet and takes no responsibility for any part of the Capital Structure Booklet, other than any references to its name and the independent expert s report as included in Attachment 5. Sources of information In preparing this report we have had access to the following principal sources of information: annual report/s for MG for the year ended 30 June 2012 to 30 June 2014 internal strategy documents prepared by MG annual reports for comparable companies company websites for MG and comparable companies publicly available information on comparable companies and market transactions published by ASIC, Thompson research, Capital IQ, and Mergermarket other publicly available information, media releases and brokers reports on MG, comparable companies and the dairy industry. In addition, we have had discussions and correspondence with certain directors and executives, including Phillip Tracy, Chairman; Peter Hawkins, Director; and David Noonan, General Manager Corporate Development in relation to the above information and to current operations and prospects. Page 25 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 142

145 Appendix B: Valuation methodologies To estimate the fair market value of the Preference Shares in MG we have considered common market practice and the valuation methodologies recommended by ASIC Regulatory Guide 111, which provides guidance in respect of the content of independent expert s reports. These are discussed below. Market based methods Market based methods estimate a company s fair market value by considering the market price of transactions in its securities or the market value of comparable companies. Market based methods include: capitalisation of maintainable earnings analysis of a company s recent security trading history industry specific methods. The capitalisation of maintainable earnings method estimates fair market value based on the company s future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from market transactions involving comparable companies. The capitalisation of maintainable earnings method is appropriate where the company s earnings are relatively stable. The most recent security trading history provides evidence of the fair market value of the securities in a company where they are publicly traded in an informed and liquid market. Industry specific methods estimate market value using rules of thumb for a particular industry. Generally rules of thumb provide less persuasive evidence of the market value of a company than other valuation methods because they may not account for company specific factors. Discounted cash flow methods Discounted cash flow methods estimate market value by discounting a company s future cash flows to a net present value. These methods are appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. Discounted cash flow methods are commonly used to value early stage companies or projects with a finite life. Asset based methods Asset based methods estimate the market value of a company s securities based on the realisable value of its identifiable net assets. Asset based methods include: orderly realisation of assets method liquidation of assets method net assets on a going concern basis. The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to securityholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the company may not be contemplated, these methods in their strictest form may not necessarily be appropriate. The net assets on a going concern basis method estimates the market values of the net assets of a company but does not take account of realisation costs. These asset based methods ignore the possibility that the company s value could exceed the realisable value of its assets as they ignore the value of intangible assets such as customer lists, management, supply arrangements and goodwill. Asset based methods are appropriate when companies are not profitable, a significant proportion of a company s assets are liquid, or for asset holding companies Page 26 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide This is a draft document. As it is a work in progress it may be incomplete, contain preliminary conclusions and may change. You must not rely on, disclose or refer to it in any document. We accept no duty of care or liability to you or any third party for any loss suffered in connection with the use of this document. 143

146 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Appendix C: Discount rate The discount rate used to equate the future cash flows to their present value reflects the risk adjusted rate of return demanded by a hypothetical investor for the asset or business being valued. Selecting an appropriate discount rate is a matter of judgement having regard to relevant available market pricing data and the risks and circumstances specific to the asset or business being valued. Whilst the discount rate is in practice normally estimated based on a fundamental ground up analysis using one of the available models for estimating the cost of capital (such as the Capital Asset Pricing Model (CAPM)), market participants often use less precise methods for determining the cost of capital such as hurdle rates or target internal rates of return and often do not distinguish between investment type or region or vary over economic cycles. Since our definition of fair market value is premised on the estimated value that a knowledgeable willing buyer would attribute to the asset or business, our selection of an appropriate discount rate needs to consider that buyers incorporate other alternatives to the typical CAPM approach in estimating the cost of capital. The rights attaching to the Preference Shares are such that the Preference Shares are more risky than debt, but less risky than ordinary equity, as set out in the following figure. Figure 7: Risk / return payoff for debt, equity and hybrid instruments Debt Convertible notes Cumulative non-convertible preference shares Cumulative convertible preference shares Non-cumulative non-convertible preference shares Non-cumulative convertible preference shares Non-cumulative non-convertible discretionary preference shares Non-cumulative convertible discretionary preference shares Equity Return / yield (%) Risk Source: Deloitte Corporate Finance analysis Notes: 1. Figure is for illustrative purposes only and is not to scale 2. For simplicity, we have assumed that conversion rights are at the discretion of the issuing company 3. The green bar represents the instrument that most closely aligns to the Preference Shares In selecting an appropriate discount rate for the Preference Shares we have considered our estimated cost of equity for MG, our estimated long-term cost of debt for MG, and the relative risk profile of the Preference Shares compared to that of the debt and equity of MG, as set out in this section. Cost of equity capital (K e ) The cost of equity, K e, is the rate of return that investors require to make an equity investment in a firm. We have used the CAPM to estimate the K e for MG. CAPM calculates the minimum rate of return that the company must earn on the equity-financed portion of its capital to leave the market price of its shares unchanged. The CAPM is the most widely accepted and used methodology for determining the cost of equity capital. Page 27 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 144

147 The cost of equity capital under CAPM is determined using the following formula: Ke Rf ( Rm Rf ) a The components of the formula are: K e = required return on equity R f = the risk free rate of return R m = the expected return on the market portfolio β = beta, the systematic risk of a stock α = specific company risk premium Each of the components in the above equation is discussed below. Risk free rate (R f ) The risk free rate compensates the investor for the time value of money and the expected inflation rate over the investment period. The frequently adopted proxy for the risk free rate is the long-term Government bond rate In order to estimate the yield on a 10-year zero coupon bond as at 18 March 2015, we have obtained the yield on a 10-year zero coupon bond as the end of February being 2.45% and then adjusted it by the movement in the 10- year coupon bond between the end of February 2015 and 18 March 2015 being 2.46%. Equity market risk premium (EMRP) The EMRP (R m R f ) represents the risk associated with holding a market portfolio of investments, that is, the excess return a shareholder can expect to receive for the uncertainty of investing in equities as opposed to investing in a risk free alternative. The size of the EMRP is dictated by the risk aversion of investors the lower (higher) an investor s risk aversion, the smaller (larger) the equity risk premium. The EMRP is not readily observable in the market and therefore represents an estimate based on available data. There are generally two main approaches used to estimate the EMRP, the historical approach and the prospective approach, neither of which is theoretically more correct or without limitations. The former approach relies on historical share market returns relative to the returns on a risk free security; the latter is a forward looking approach which derives an estimated EMRP based on current share market values and assumptions regarding future dividends and growth. In evaluating the EMRP, we have considered both the historically observed and prospective estimates of EMRP. Historical approach The historical approach is applied by comparing the historical returns on equities against the returns on risk free assets such as Government bonds, or in some cases, Treasury bills. The historical EMRP has the benefit of being capable of estimation from reliable data; however, it is possible that historical returns achieved on stocks were different from those that were expected by investors when making investment decisions in the past and thus the use of historical market returns to estimate the EMRP would be inappropriate. It is also likely that the EMRP is not constant over time as investors perceptions of the relative riskiness of investing in equities change. Investor perceptions will be influenced by several factors such as current economic conditions, inflation, interest rates and market trends. The historical risk premium assumes the EMRP is unaffected by any variation in these factors in the short to medium term. Historical estimates are sensitive to the following: the time period chosen for measuring the average the use of arithmetic or geometric averaging for historical data selection of an appropriate benchmark risk free rate the impact of franking tax credits Page 28 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 145

148 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS exclusion or inclusion of extreme observations. The EMRP is highly sensitive to the different choices associated with the measurement period, risk free rate and averaging approach used and as a result estimates of the EMRP can vary substantially. We have considered the most recent studies undertaken by the Securities Industry Research Centre of Asia- Pacific Limited, Morningstar Incorporated, ABN AMRO/London Business School and Aswath Damodaran. These studies generally calculate the EMRP to be in the range of 5% to 8%. Prospective approach The prospective approach is a forward looking approach that is current, market driven and does not rely on historical information. It attempts to estimate a forward looking premium based on either surveys or an implied premium approach. The survey approach is based on investors, managers and academics providing their long term expectations of equity returns. Survey evidence suggests that the EMRP is generally expected to be in the range of 6% to 8%. The implied approach is based on either expected future cash flows or observed bond default spreads and therefore changes over time as share prices, earnings, inflation and interest rates change. The implied premium may be calculated from the market s total capitalisation and the level of expected future earnings and growth. Selected EMRP We have considered both the historically observed EMRP and the prospective approaches as a guideline in determining the appropriate EMRP to use in this report. Australian studies on the historical risk premium approach generally indicate that the EMRP would be in the range of 5% to 8%. In recent years it has been common market practice in Australia in expert s reports and regulatory decisions to adopt an EMRP of 6.0% to 7.5%. The recent severe decline in equity values worldwide and the difficulty companies are experiencing in raising equity capital may be indicative of investors demanding a greater risk premium. In addition, with particular regard to expected future cash flows and observed bond default spreads, current prospective measures appear to indicate an increase in the EMRP. Having considered the various approaches and their limitations, we consider an EMRP of 7.5% to be appropriate. Beta estimate (β) Description The beta coefficient measures the systematic risk or non-diversifiable risk of a company in comparison to the market as a whole. Systematic risk, as separate from specific risk as discussed below, measures the extent to which the return on the business or investment is correlated to market returns. A beta of 1.0 indicates that an equity investor can expect to earn the market return (i.e. the risk free rate plus the EMRP) from this investment (assuming no specific risks). A beta of greater than one indicates greater market related risk than average (and therefore higher required returns), while a beta of less than one indicates less risk than average (and therefore lower required returns). Betas will primarily be affected by three factors which include: the degree of operating leverage employed by the firm in that companies with a relatively high fixed cost base will be more exposed to economic cycles and therefore have higher systematic risk compared to those with a more variable cost base the degree of financial leverage employed by a firm in that as additional debt is employed by a firm, equity investors will demand a higher return to compensate for the increased systematic risk associated with higher levels of debt correlation of revenues and cash flows to economic cycles, in that companies that are more exposed to economic cycles (such as retailers), will generally have higher levels of systematic risk (i.e. higher betas) relative to companies that are less exposed to economic cycles (such as regulated utilities). Page 29 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 146

149 The betas of various Australian industries listed on the ASX are reproduced below and provide an example of the relative industry betas for a developed market. Figure 8: Betas for various industries (as at 31 December 2014) Consumer durables & apparel Metals & mining Capital goods Technology hardware & equipment Real estate (excl investment trusts) Energy Retailing Banks Insurance Commercial services & supplies Diversified financials Consumer services Automobile & components Software & services Media food & staples retailing + household & personal products Materials (excl metals & mining) Transportation Real estate investment trusts pharmaceuticals & biotechnology & life sciences Telecommunication services food beverage & tobacco Health care equipment & services Utilities Source: Securities Industry Research Centre of Asia-Pacific Limited The differences are related to the business risks associated with the industry. For example, the above diagram indicates commercial services and supplies companies are more correlated to overall market returns with a beta close to 1.0 whereas telecommunications and other infrastructure companies (in particularly those that are regulated) typically have betas lower than 1.0. The geared or equity beta can be estimated by regressing the returns of the business or investment against the returns of an index representing the market portfolio, over a reasonable time period. However, there are a number of issues that arise in measuring historical betas that can result in differences, sometimes significant, in the betas observed depending on the time period utilised, the benchmark index and the source of the beta estimate. For unlisted companies it is often preferable to have regard to sector averages or a pool of comparable companies rather than any single company s beta estimate due to the above measurement difficulties. Market evidence In estimating an appropriate beta for MG we have considered the betas of listed companies that are comparable to MG. These betas, which are presented below, have been calculated based on weekly and monthly returns, over a two and four year period, compared to the relevant domestic index and the Morgan Stanley Capital International World Index. Page 30 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 147

150 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Table 11: Analysis of betas for listed companies with comparable operations to MG Company name Enterprise value 1 ($ million) Debt to enterprise value (%) Two year weekly returns Four year monthly returns Domestic levered beta Domestic unlevered beta Domestic levered beta Domestic unlevered beta Australian and New Zealand dairy producers and distributors Fonterra Co-Operative Group Limited 13,274 31% Bega 777 7% WCB 520 7% The a2 Milk Company Limited n/m n/m Average 3,726 11% International dairy producers and distributors Saputo 16,218 13% China Mengniu Dairy Co. Limited 12, Parmalat SpA 4, Emmi AG 3,065 14% Fromageries 3,150 7% Bel Unibel S.A 2,507 6% Vitasoy International Holdings Limited 2, Bongrain S.A 1,950 36% Hochdorf Holding AG % Average 5,131 12% International nutritional and probiotic dairy processers Mead Johnson Nutrition Company 26,931 1% Yakult Honsha Company Limited 14, Average 20,774 0% International diversified food producers Nestlé S.A. 331,419 5% Mondelez International Incorporated 93,027 20% Danone 51, Goodman Fielder Limited 1,858 29% Average 119,556 13% Source: CapitalIQ and Deloitte analysis Notes: 1. Enterprise value as at 18 March Excluded from averages due to low coefficient of determination (R-squared) 3. n/m = not meaningful Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide Page

151 The observed beta is a function of the underlying risk of the cash flows of the company, together with the capital structure and tax position of that company. This is described as the levered beta. The capital structure and tax position of the entities in the table above may not be the same as those of MG. The levered beta is often adjusted for the effect of the capital structure and tax position. This adjusted beta is referred to as the unlevered beta. The unlevered beta is a reflection of the underlying risk of the pre-financing cash flows of the entity. Selected beta (β) In selecting an appropriate beta for MG we have considered the following: the average two year weekly and four year monthly unlevered beta for the Australian and New Zealand dairy producers and distributors companies that are comparable to MG is 0.93 and 0.76, respectively Fonterra is the most comparable company since it operates under a partially listed co-operative structure and has exposure to dairy exports into Asian markets. Fonterra has a four year unlevered beta of We note that we have disregarded Fonterra s two year beta due to its low coefficient of determination Bega also exports dairy products into Asian markets. On this basis we also consider Bega s beta to be relevant to MG. Bega s two year and four year unlevered betas are 0.60 and 0.62, respectively the a2 Milk Company derives a portion of its revenues from licencing its milk processing technology. For this reason we have had less regard to the observed betas for this company given that there are few listed Australian companies which are comparable to MG, we have also had regard to international companies. The International dairy producers and distributors generally were larger and more diversified than the Australian and New Zealand companies. The average two year weekly and four year monthly unlevered beta for the International dairy producers and distributors companies was 0.62 and 0.51, respectively we have also had regard to food processors with exposure to the dairy processing market. With the exception of Goodman Fielder, the observed beta for the diversified food producers that we consider somewhat comparable to MG are broadly lower than the Australian and New Zealand comparable companies. Excluding data points which are not statistically significant, this group had a two year and four year beta of 0.77 and 0.75, respectively the observed two year and four year betas for the nutritional and probiotic dairy processers are 1.04 and 0.60, respectively we have assessed a market level of gearing of 20% based on MG s expected gearing following the Capital Restructure and the gearing of comparable Australian and New Zealand dairy producers, excluding outliers of 20% assuming an unlevered beta of 0.70 to 0.80, a corporate tax rate of 30% and a debt to enterprise value of 20% results in a re-levered and Blume adjusted beta of 0.88 to this re-levered beta is in line with the levered betas observed for MG and the companies that are comparable to it. On this basis we have selected an unlevered beta of 0.70 to 0.80 for MG. Selection of specific company risk premium In assessing the cost of equity for MG, we have applied a specific company risk premium in the range of 0.5% to 1.0% to reflect the risks associated with implementing the Growth Initiatives, including potential cost overruns, project delays as well as achieving the expected financial performance of the Growth Initiatives. We note that whilst the identified comparable companies are also undertaking capital investment in similar growth initiatives, the Growth Initiatives being undertaken by MG are considerably larger relative to its enterprise value than the growth initiatives of the comparable companies. Page 32 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 149

152 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS Conclusion on cost of equity Based on the above factors we arrive at a cost of equity, K e, as follows: Table 12: Ke applied to valuation of MG Input Low High Risk free rate (%) 2.6% 2.6% EMRP (%) 7.50% 7. 50% Beta (unlevered) Beta (levered) Specific company risk premium (%) 0.5% 1.0% K e calculated (%) 9.6% 10.7% Source: Deloitte analysis Cost of debt capital (Kd) We have estimated MG s cost of debt to be 6.0% to 7.0%, based on the following considerations: MG s debt has not been rated by any of the major credit rating agencies. Accordingly, we have had regard to the credit ratings of the comparable listed companies set out in Table 11 The comparable companies with listed debt securities, being Fonterra, China Mengniu Dairy Company, Mondelez International Incorporated, Nestle Incorporated and Danone, have debt ratings ranging from A to BBB. Of these companies, we consider Fonterra to be the most comparable due to its co-operative structure, milk processing operations and exposure to Asian growth markets. Fonterra has a Standard and Poor s credit rating of A to A- as at 18 March 2015, the implied debt spread on Fonterra s debt is approximately 134 bps on the bank bill swap rate (BBSW) the debt margin on recent Australian-denominated A-rated debt issuances is in the range of 96 bps to 150 bps and on recent Australian-denominated BBB-rated debt issuances is in the range of 127 bps to 215 bps for five-year debt as at 28 February 2015 the Reserve Bank of Australia s (RBA) has estimated the aggregate corporate bond spread to be 84 bps on the BBSW for Australian companies with an A-credit rating, and to be 150bps on the BBSW for Australian companies with a BBB credit rating the margin on MG s AUD-denominated working capital and syndicated debt facilities is in the range of 100bps to 125bps while the current BBSW as at 18 March 2015 is 2.3%, the long term historical BBSW since 2000 has been 4.7% the spot rate implied by the 15 year forward yield curve is currently at very low levels, as the current yield curve is impacted by an historically low cash rate following the RBA s monetary easing measures. We note that the RBA has cut interest rates by 250bps Since November 2011 the ten year average of the implied five year swap rate between 5.0% to 5.5% assuming a long term BBSW in the range of 5.0% to 5.5% and a debt margin in the range of 100bps to 150 bps would result in a long-term implied cost of debt in the range of 6.0% to 7.0% the average effective interest rate on MG debt facilities for the calendar year ending 31 December 2014 was 4.4% p.a. We note that this all-in interest rate is not representative of a long-term expected cost of debt for MG, given that interest rates are currently at historical lows we consider a long-term cost of debt of 6.0% to 7.0% to be achievable at a market level of gearing of 20%. The selected market level of gearing was estimated having regard to MG s expected gearing following the Capital Restructure and the level of gearing of the comparable Australian and New Zealand dairy producers of 20% (excluding outliers). Page 33 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 150

153 Selection of required rate of return on Preference Shares In selecting an appropriate discount rate for the Preference Shares we have considered our estimated cost of equity for MG, our estimated long-term cost of debt for MG, and the relative risk profile of the Preference Shares compared to the debt and equity of MG. In particular, we note the following: we have estimated the post-tax required rates of return on the equity of MG to be in the range of 9.6% to 10.7%. We consider that a hypothetical investor would require a lower rate of return on the Preference Shares than on ordinary equity for the following reasons: o historically, dividends paid on Preference Shares have been more stable, and at lower rates, than dividends paid on ordinary shares o according to the constitution of MG, Preference Shareholders and Ordinary Shareholders have equal entitlements to receive an allocation of any annual surplus declared by the Board. 3 However, we note that no annual surplus has been declared in recent years, and management has advised that none is likely to be declared in the foreseeable future o if MG were wound up, Preference Shareholders would be repaid capital in priority to ordinary shareholders we have estimated the cost of debt of MG to be in the range of 6.0 to 7.0% (refer to Appendix C). We consider that a hypothetical investor would require a higher rate of return on the Preference Shares than on debt issued by MG for the following reasons: o debt has a priority claim over the assets of the company compared to the Preference Shares in the event of winding up o debt has a guaranteed interest repayment, whereas while distributions on Preference Shares have been relatively stable over time, they are solely at the discretion of the Board we have considered the rates of return on hybrid securities issued by Australian companies, however we do not consider these to provide a reasonable benchmark for the required rate of return for the Preference Shares, for the following reasons: o most of the companies with hybrid securities on issue are financial institutions and/or companies which are much larger than MG o unlike the Preference Shares, many hybrid securities are not indefinite life instruments and mature within a four year time period o most preference shares have a fixed cumulative dividend, whereas the dividends on the Preference Shares are non-cumulative and paid at the Board s discretion o many preference shares or other hybrid securities are convertible into ordinary shares, unlike the Preference Shares, which are not convertible, unless the Preference Share Conversion is approved. Based on the considerations listed above, we estimate the required rate of return on the Preference Shares to be between the rate of return required on MG s debt and equity, but closer to the required rate of return on MG s equity than on MG s debt. Accordingly, we estimate the required rate of return on the Preference Shares to be at least 8.5%, based on our estimates of MG s cost of equity and cost of debt. Table 13: Required rate of return on the Preference Shares Unit Low High Cost of equity capital % 9.6% 10.7% Cost of debt capital % 6.0% 7.0% Source: Deloitte analysis 3 We note that this is not the case for rights on surplus in the event of winding up Page 34 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 151

154 ATTACHMENT 5 B CLASS PREFERENCE SHAREHOLDERS ATTACHMENT 5 C CLASS PREFERENCE SHAREHOLDERS About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's approximately 182,000 professionals are committed to becoming the standard of excellence. About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,700 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte s web site at Member of Deloitte Touche Tohmatsu Limited 2015 Deloitte Corporate Finance Pty Limited Page 35 Deloitte: Murray Goulburn Co-operative Co. Limited Independent expert s report for Preference Shareholders and Financial Services Guide 152

155 ATTACHMENT 6 Glossary of defined terms Term ASIC Meaning Australian Securities and Investments Commission. ASX Australian Securities Exchange. B Class Preference Share a B class preference share in the capital of Murray Goulburn. B Class Preference Shareholder a holder of a B Class Preference Share. Board the board of directors of Murray Goulburn. Capital Structure the proposed new capital structure, which will involve creating the Unit Trust and listing Units on the Australian Securities Exchange pursuant to an IPO, establishing the Shareholder Trading Platform and undertaking the Supplier Share Offer and the Supplier Priority Offer. Constitution the constitution of Murray Goulburn as amended on 27 November 2014 and as subsequently amended from time to time. Corporations Act Corporations Act 2001 (Cth). Convertible Preference Share the meaning in section of this Capital Structure booklet. C Class Preference Share a C class preference share in the capital of Murray Goulburn. C Class Preference Shareholder a holder of a C Class Preference Share. Director a director of Murray Goulburn. DRP Dividend Reinvestment Plan. EGM extraordinary general meeting. FMP the actual farmgate milk price. Implementation Date the date of the IPO or such earlier date as may be determined by the Board in its discretion. Independent Expert Deloitte Corporate Finance Pty Limited. Independent Expert s Reports the reports prepared by the Independent Expert in relation to: the Capital Structure; and the consolidation and conversion of B Class Preference Shares and C Class Preference Shares into Non-voting Shares, copies of which are attached to the Capital Structure booklet that has been sent to all Shareholders and Preference Shareholders at the same time as the notices of meeting and is deemed to be incorporated into the notices of meeting. 153

156 ATTACHMENT 6 Glossary of defined terms continued Term IPO Meaning initial public offering of Units in the Unit Trust. Lenders those lenders who have entered into a STP Side Deed with Murray Goulburn. Market Facilitator an entity (initially Macquarie Securities (Australia) Limited) appointed by Murray Goulburn from time to time to act as a conduit between the ASX market for Units and the STP which transacts with the Nominated Broker to buy or sell Shares. MG Unit a single Unit in the Unit Trust held by a member of the Murray Goulburn Group. Milk Pool calculated as Murray Goulburn s net profit before income tax and milk payments. Murray Goulburn Murray Goulburn Co-operative Co. Limited ABN Murray Goulburn Group Murray Goulburn and its related bodies corporate. Nominated Broker a stockbroker (initially Third Party Platform Pty Ltd trading as Bell Direct) appointed by Murray Goulburn from time to time to provide certain services in relation to the STP. Non-participating Unit a non-participating unit in the Unit Trust. Non-voting Share a non-voting class share in the capital of Murray Goulburn. NPAT net profit after tax. Ordinary Resolution a resolution that has been passed by a majority of Shareholders entitled to vote on the resolution. Preference Share a preference share in the capital of Murray Goulburn, including a B Class Preference Share or C Class Preference Share. Preference Shareholder a holder of any Preference Shares. Share an ordinary share in the capital of Murray Goulburn, including both Voting Shares and Non-Voting Shares. Shareholder a holder of a Share. Share Rebalancing a transaction facilitated by the Market Facilitator in relation to Shares in order to bring the Market Facilitator s net position as a result of trades made by Shareholders during a particular day to zero. Share Standard as set out in section 3.2 of this Capital Structure booklet. Special Director as defined in the Constitution. 154

157 Glossary of defined terms continued Term Special Resolution Meaning a resolution that has been passed by 75 per cent or more of the votes cast by Shareholders entitled to vote on the resolution. SSO Supplier Share Offer. STP or Shareholder Trading Platform a private online trading platform that will permit Shareholders to trade Shares through the Nominated Broker, subject to certain conditions. STP Side Deed a deed to be entered into by Murray Goulburn and each Lender that sets out the terms in relation to the operation of the STP, security interests in Shares and restrictions on ownership and voting rights. Supplier means: (a) a Shareholder who is a person who is (or is in the process of becoming) a supplier of milk to Murray Goulburn; or (b) a shareholder or partner in a person referred to in (a). Unit an ordinary interest in the Unit Trust. Unitholder a holder of a Unit. Unit Rebalancing a transaction facilitated by the Market Facilitator in relation to Units in order to bring the Market Facilitator s net position as a result of trades made by Shareholders during a particular day to zero. Unit Trust a separate legal structure to be established by Murray Goulburn that will issue Units to investors. Voting Share an ordinary share in the capital of Murray Goulburn that attracts voting rights at general meetings of Murray Goulburn as set out in rule 4 of the Constitution. 155

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