The former New Zealand Dairies (NZDL) suppliers became Fonterra suppliers this season following the co-op’s purchase of the plant, but weren’t able to buy shares to back their production straight away. One, Robert Borst, said it had always been their fear that with trading among farmers (TAF) launching the share price, expected to mirror the fund unit price, would climb.
“And that’s what happened,” he said. “When the unit price was announced we straight away faced the risk that we’d have to front up with significantly more money.”
In Borst’s case, if units continue to trade close to the opening price and shares follow that, he would have to pay around $1.7m more than at the start of the season. All up former NZDL suppliers would be in the gun for close to $59m and Borst personally would have to front with $9.35m.
But they don’t have to come up with all the shares at the end of this season with an arrangement with Fonterra under which they can delay starting to share up for four years.
Borst said he’d never had any interest in the sharemarket but now he was going to have to watch share and fund unit trading closely and become an expert on what price influencers could be, given the impact price changes will have on his business.
“Our specialty is dairy farming not trading shares … but I’m going to have to take advice and more interest in this.”
For Fonterra, already understood to have covered much of its purchase price with incoming equity from the new shares at $4.52, the possibility it could get an additional $10m if shares trade close to the opening price will be an added bonus.
“From a Fonterra shareholder’s point of view the plant’s been pretty good buying; they’ve done a sharp deal,” Borst said.
The opening unit price of $5.50 when TAF launched on November 30 was at the top end of the range given by Fonterra at the prospectus launch. It was driven up by extremely strong demand for the units in this country and overseas. That meant the fund was pushed out to the maximum $525m level.
Fonterra said after Australia, which included a Friends of Fonterra allocation, the next biggest slice of offshore investors came from Europe and then Asia in contrast to earlier media speculation over China’s interest. Unconfirmed reports suggest China's sovereign wealth fund, the $US400 billion China Investment Corp (CIS) bought no units. Speculation is that the small allocation it would have received didn’t fit with its policy.
US investors were excluded from the offer because of the additional complexity and cost that would have been involved, Fonterra said.
Chief executive Theo Spierings said more than 2500 individuals were allocated units through the Friends of Fonterra and Bonlac supply offer with all of those applying receiving their requested amounts. Around 7000 retail and institutional investors were also allocated units with 58% going to NZ-based investors and 42% to offshore interests.
Not all NZ investors received what they’d applied for and there’s been some criticism that locals should have been taken care of first. But Fonterra said the split was driven by the co-op’s overall objective to support the fund by having a good balance between retail investors who are more likely to hold on to their units and professional, offshore and NZ investors who are likely to actively trade units and provide the liquidity needed.
Good quality professional and institutional investors with respected track records had been looked for and the aim had always been to ensure the majority of units went to New Zealanders.
The split was the right one to meet Fonterra’s overall objective of driving liquidity in the Fonterra shareholders’ market to the benefit of its farmer shareholders.
While the unit fund has been wildly popular with investors, farmer shareholders have shied away from relinquishing the economic rights to their shares. Many sought to buy units with around 900 existing farmer shareholders taking advantage of the Friends of Fonterra allocation.
The co-op believes farmers are taking a “wait and see” approach, wanting tosee how units trade on the NZX and ASX before making any decision on selling their share’s economic rights. That would indicate many had been expecting the price to lift after the launch.
At $5.50/unit last season’s dividend would have provided a 5.82% return on investment (ROI).
Farmers’ reluctance meant the co-op was forced to issue 90m new shares to the Fonterra farmer custodian, equivalent to $495m if $5.50 was the issue price. Fonterra stands to gain from that with the money to sit on its balance sheet, reducing its gearing further in the short term or until farmers decide to take up future opportunities to sell economic rights.
The money has been earmarked to pay for those shares so funds will have to be readily available for that. Fonterra, though, will decide when and how often farmers are given the opportunity to sell economic rights. It has indicated the first time will be after the announcement of interim results in March.
In the meantime Fonterra said it made sense to make good use of the $495m, offsetting it against debt “and/or ensuring the co-op earns a sound return from it”.
Aaron Jenkins, the man charged with overseeing trading among farmers (TAF) was excited to see its launch late last month following almost two years working on the project.
The general manager, TAF joined Fonterra as a consultant in January 2011 to work on the system and market design. A year on the Australian joined the cooperative as a permanent member of staff and moved with his family to New Zealand.
Jenkins has a background in technology and finance and previously worked in wholesale broking for E*Trade in Australia.
In his new role he will report directly to Fonterra chief financial officer Jonathan Mason.
