From the Farm: Fonterra’s NZX debut

By Jonathan Underhill

For all the townie gripes about big dairy fouling waterways and making monopoly rents it turns out we love Fonterra.

Some 58 percent of the units in the $525 million Fonterra Shareholders’ Fund were allocated to New Zealand retail and institutional investors and the class of investors known as Friends of Fonterra, which includes suppliers to Australia’s Bonlac.

They’re called units because Fonterra isn’t opening up its share register to outsiders, but they’re like shares because they pay dividends tied to the cooperative’s profit. They were sold at the top end of the marketed range, $5.50, which is a signal investors were clamoring for more and were scaled back in how much they could buy.

At that price the units will yield about 5.5 percent based on the forecast 2013 dividends of 32 cents a share. Fletcher Building, the biggest company on the NZX 50, has a dividend yield of 5.4 percent and lines company Vector yields 5.45 percent.

You would have to put your money on term deposit for five years to get anywhere near that yield (4.99 percent according to interest.co)

A fund of $525 million is about the same size as the market capitalization of an NZX 50 company such as Tower, slightly smaller than Nuplex Industries and slightly larger than Michael Hill International. So it is the equivalent of a medium-sized company on the bourse.

Outstanding then that 42 percent of the units were able to be sold offshore. A New Zealand fund of that size that wasn’t tied to Fonterra would typically be too small to attract much interest from overseas.

Fonterra is issuing about 90 million shares to the Fonterra Farmer Custodian to make up the shortfall of shares offered into the fund by Fonterra’s farmers. That too is a small amount. By contrast, Telecom has 1.8 billion shares on issue.

Some 9,500 investors took up the units, which isn’t too paltry a pool of investors. Tower, for example, has 9,520 shareholders. Fletcher Building, which also trades on the ASX, has 47,811

That all leaves a question mark over how these units will trade today.

They may rally when they debut at noon, as some professional investors are touting, because people who missed out in the initial public offering will try to buy them on market. A trading debut can also be an opportunity for people to stag the units, selling them quickly if they rise on the first day.

On the other hand, the units don’t carry voting rights as shares of Fonterra do and there’s an argument they should trade at a discount.

It is clear the structure of the fund is uncharted territory for the NZX and investors from a reading of the ‘risks’ section of the promotional material brokers put around in the past two months. “The fund and its relationship with the Fonterra Shareholders’ Market are novel. The structure has been carefully designed but is untested and there is therefore some uncertainty about how it will perform.”

There’s supposed to be no arbitrage between the share price and the price of the units – they should converge. “There is, however, no assurance that this will be achieved or, if achieved, how long it will take or whether it will be maintained.”

There’s also no certainty that the units will be liquid enough to make an efficient market. Liquidity and prices of the units “could be affected by constraints on supply, or oversupply, of shares for the purposes of the fund.”

That’s notwithstanding the existence of a registered volume provider for the Fonterra Shareholders Market. That’s the part that does need to perform efficiently as it is the vehicle for the farmers to modify their shareholding as their milk production fluctuates.

Fonterra is no stranger to the NZX. It has $950 million of exchange traded bonds. But they pay fixed rates of interest. They don’t have growth characteristics. A direct exposure to a share of Fonterra’s profits is long overdue. It has long been the case that the composition of the NZX doesn’t mirror the New Zealand economy, with precious few ways to get exposure to the primary sector.

Fonterra will celebrate the NZX debut of its units in style in Darfield, Canterbury, today, where Prime Minister John Key is among dignitaries attending the opening of its new milk powder factory. A bell has even been made to ring in the trading debut, just like on the New York Stock Exchange. It will be ringing in a new era for Fonterra.

(BusinessDesk)

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