Minor impacts (i.e. less than five percent) on Murray Goulburn’s milk intake do not have a material impact on the business as these variations are typically absorbed through product mix optimisation, and therefore this sensitivity is shown as having no effect on Milk Payments (Southern Milk Region) or pro forma NPAT attributable to Shareholders and Unitholders in the table above.
Investors should be aware, however, that the impact of a more significant reduction in milk supply cannot be reliably estimated. The impact would have the potential to be material due to the potential inability to supply markets to the level expected, combined with the impact on factory inefficiencies and recoveries.
7.13 MG Unit Trust and Sub-trust financial information
7.13.1 Background
Murray Goulburn is implementing a Capital Structure pursuant to which:
• Murray Goulburn will establish the MG Unit Trust, a special purpose funding vehicle, which will be listed on the ASX. Units in the MG Unit Trust will be issued to external investors pursuant to the IPO by the Responsible Entity, a wholly-owned subsidiary of Murray Goulburn;
• All of the funds raised by the issue of the Units will be lent on an interest-free basis to the Sub-trust. All of the Units in the Sub-trust are held by the Responsible Entity. The trustee of the Sub-trust is also a wholly-owned subsidiary of Murray Goulburn. The Sub-trust will use the loan to subscribe for Notes. The number of Units on issue in the MG Unit Trust at any time will equal the aggregate number of Notes and CPS held in the Sub-trust; and
• The Sub-trustee will distribute to the Responsible Entity all of the distributions on Notes and dividends on CPS that the Sub-trust receives. The Responsible Entity will distribute to Unitholders all of the distributions which it receives from the Sub-trustee.
The MG Unit Trust and the Sub-trust will be established in May 2015 and accordingly have no historical financial information prior to this date. The MG Unit Trust will not prepare consolidated financial statements because it is deemed not to control the Sub-trust, however the financial information presented in their single entity accounts will essentially be the same. The costs of the SSO, the Priority Offer and the IPO and all the operational costs of the MG Unit Trust, the Sub-trust, the Responsible Entity and the Sub-trustee will be paid by Murray Goulburn.
7.13.2 Forecast Results and Forecast Cash Flows
The Sub-trust will recognise distributions on Notes and the dividends on CPS when they are paid by Murray Goulburn. The Sub-trustee will distribute to the Responsible Entity all of the distributions on Notes and dividends on CPS that the Sub-trust receives. The Responsible Entity will distribute to Unitholders all of the distributions which it receives from the Sub-trustee. The MG Unit Trust’s liability to Unitholders will be measured at fair value through its income statement, with fair value movements being equal and offsetting to changes in fair value of the MG Unit Trust’s investment in the Sub-trust. Similarly, the Sub-trust’s liability to the MG Unit Trust will be measured at fair value through its income statement, with fair value movements being equal and offsetting to changes in fair value of the Sub-trust’s investment in Notes and CPS.
Essentially therefore, in each financial year:
• the forecast income of the MG Unit Trust and the Sub-trust will be offset by forecast expenditure such that the forecast results before and after tax for both trusts will net to $nil; and
• the MG Unit Trust and the Sub-trust will each receive and pay out amounts such that cash inflows and outflows will be equal and offsetting and for both trusts will net to $nil.
The forecast distribution to be paid to Unitholders in the FY16 financial year will represent the interim distribution on Notes and the interim dividend on CPS to be determined by Murray Goulburn in respect of the six month period ending 31 December 2015 in accordance with the Profit Sharing Mechanism. At the date of this Prospectus, this cannot be reliably quantified because the number of Shares and Units on issue at the Completion of the IPO is unknown and accordingly there are not reasonable grounds to include FY16 forecast results and cash flows for the MG Unit Trust or the Sub-trust.
7.13.3 Pro Forma Balance Sheets
The size of the IPO capital raising cannot currently be reliably quantified as it depends on the size of the SSO and Priority Offer capital raisings. The three capital raisings are expected to raise approximately $500 million in aggregate but the size of each offering will depend on factors including Shareholder and external investor interest. Accordingly there are not reasonable grounds to include pro forma balance sheets of the MG Unit Trust and the Sub-trust as at their date of establishment in May 2015 in this Prospectus.
Pursuant to the Capital Structure steps detailed in Section 7.13.1:
• The MG Unit Trust’s loan to and investment in the Sub-trust will be measured at fair value through the income statement, as will the Sub-trust’s investment in Murray Goulburn Notes and CPS.
• The MG Unit Trust’s liability to Unitholders will also be measured at fair value through the income statement, as will the Sub-trust’s liability to MG Unit Trust.
• The various instruments in the MG Unit Trust and the Sub-trust are economically equivalent. Fair value will be based on the unit price of MG Unit Trust Units which are listed on the ASX.
Key risks
8
8.1 Introduction
This Section 8 describes some of the potential risks associated with an investment in Murray Goulburn. An investment in Murray Goulburn exposes investors to the specific and general risks facing Murray Goulburn’s business. An investment in Murray Goulburn after the implementation of the Capital Structure also exposes investors to structural risks
associated with the Capital Structure.
The risks associated with an investment in Murray Goulburn under the Offer can be separated into two main categories: • business risks of Murray Goulburn that are either specific to the operation of Murray Goulburn’s business or generally
applicable to the dairy industry; and
• structural risks arising from the new Murray Goulburn Capital Structure.
Each of these risks could, if they eventuate, have a material adverse effect on your investment. Each of the business risks of Murray Goulburn could, if they eventuate, have a material adverse effect on Murray Goulburn’s business, financial condition, operating and financial performance and Shareholder returns. Many of the circumstances giving rise to these risks are beyond the control of Murray Goulburn, its Directors and Management.
You should note that the risks described in this Section 8 are not the only risks faced by Murray Goulburn. Additional risks that Murray Goulburn is unaware of or that Murray Goulburn currently considers to be immaterial also have the potential to have a material adverse effect on Murray Goulburn’s business, financial condition and operating and financial performance, and therefore, may have a material adverse effect on the performance of Murray Goulburn. Before deciding whether to invest in Murray Goulburn, you should read the entire Prospectus and satisfy yourself that you have a sufficient understanding of these potential risks and should consider whether an investment in Murray Goulburn is suitable for you having regard to your own investment objectives, financial circumstances and taxation position.
If you do not understand any part of the Prospectus or are in any doubt as to whether to invest in Murray Goulburn, you should seek professional advice from your accountant or other professional adviser.
8.2 Business risks of Murray Goulburn
8.2 .1 Failure to grow, or a reduction in, milk supply
The majority of milk supply arrangements with Suppliers are not the subject of fixed term or long-term contracts (common practice in the dairy industry). Therefore, many Suppliers can choose to cease supplying Murray Goulburn at any time or on short notice. This could lead to a reduction in the amount of milk available for processing by Murray Goulburn. Murray Goulburn’s strategy relies partly on continuing to grow its milk supply. Milk supply growth is available through a combination of organic growth (existing Suppliers increasing their supply) and through the recruitment of new Suppliers.
If there was a significant reduction in milk supply available for processing or Murray Goulburn is unable to grow its milk supply in accordance with its strategy or at all for any reason, including because of Suppliers choosing to cease supplying Murray Goulburn, Suppliers not investing in the growth of their supply, Murray Goulburn being unable to recruit new Suppliers, adverse weather conditions, a reduction in the number of dairy farmers, increases in input costs, a decrease in the relative returns of dairy farming, increased competition for milk supply or other actions of competitors, then this would reduce Murray Goulburn’s ability to manufacture and market its range of dairy and nutritional products and could reduce Murray Goulburn’s ability to successfully pursue its strategy. Such circumstances may also adversely impact on Murray Goulburn’s production costs base and expected return on capital investment and Murray Goulburn’s strategy of being an efficient and flexible processor. Any of these circumstances may materially and adversely affect Murray Goulburn’s revenue, profitability and growth.