By Tony Field
Fonterra has unveiled details of how the public can invest with the co-operative.
It has confirmed plans for a $500 million Fonterra Shareholders' Fund to list on the sharemarket at the end of November.
Fonterra's chairman Sir Henry van der Heyden said "the fund provides a unique opportunity for the public to gain exposure to the financial performance of Fonterra and the global dairy industry."
The Fonterra Shareholders Fund is part of the Trading Among Farmers initiative, which is designed to free up capital for the co-operative.
A final price for the units in the Shareholders' Fund has not been set, but it is likely to be between $4.60 and $5.50 per unit. That is above Fonterra's most recent fair value share price of $4.52.
Fonterra has forecast a dividend for the 2013 financial year of 32 cents per share, which would imply a gross dividend yield of between 5.8 percent 7 percent, depending on the final unit price.
At a media briefing Sir Henry stressed that the $4.60 figure was a line in the sand.
"We will not be pushing the button on Trading Amongst Farmers if there is a number below $4.60."
There is no guaranteed allocation for the general public. Instead New Zealand residents will need to contact a local stockbroker to apply for units before they begin trading on the open market.
Fonterra has discussed the fund with a large number of institutional investors here and in Australia and in some other foreign territories.
Fonterra's chief executive Theo Spierings said "what we sense is that demand is solid, demand is really solid."
Brooke Bone, a senior equity analyst with Milford Asset Management said "I think the interest is going to be huge", from institutional and individual investors.
That is in spite of the fact investors in the Shareholders' Fund won't be directly buying shares in Fonterra and will not have any voting rights.
Fonterra says control of the co-operative will remain 100 percent in the hands of its 10,500 shareholder farmers.
Brooke Bone said "people are starting to look at the New Zealand market again. If you look around the world at the moment the New Zealand economy is actually doing better than the majority of the world, so this is quite a good opportunity to put New Zealand back on the map as an investment opportunity."
Fonterra's 10,500 farmers will continue to receive full payment for the raw milk their farms supply to the co-operative.
Investors in the fund won't receive a portion of the raw milk payment, unless they are also shareholder farmers.
The final price for the units will be set on November 27, after a ‘book build’ process in which institutional investors and NZX firms lodge bids indicating the number of units they would be prepared to bid for at a range of prices.
The fund is being set up alongside a separate Fonterra Shareholders' Market, which will allow Fonterra's farmers to trade shares among themselves, rather than buying and selling them to Fonterra.
Fonterra said the initiatives are necessary to create permanent capital for the co-operative and to avoid what it calls "redemption risk". If a farmer wants to leave the co-operative, or their production drops for some reason, they can sell their shares back to Fonterra.
This means money washes in and out of Fonterra's balance sheet, but it's hard for the co-operative to predict the amount of money that will be redeemed each year.
In late 2008 Fonterra found itself writing cheques totalling around $600 million as farmers decided they wanted to sell up.
A portion of shares is being set aside for Friends of Fonterra. This will include employees, sharemilkers, current and some retired shareholders. The minimum amount they can apply for is $2000, with a maximum of $50,000. Fonterra's New Zealand and Australian staff can apply for a maximum of $25,000 of units.
The offer to former Fonterra farmers is restricted to those who have retired from the industry since November 2007 and who have not supplied a competitor since last supplying Fonterra.
There is room for the fund to accept $25 million of oversubscriptions.
Fonterra's 10,500 shareholder farmers will be able to sell a portion of the economic rights of their shares to the fund. If the economic rights offered by farmer shareholders are less than $500 million Fonterra will issue shares to make up the shortfall.
Fonterra says it does not intend to permanently retain the existing equity.
PWC chairman John Shewan will lead a group of five people who will sit on the board of the new fund. It will be made up of professional director Pip Dunphy, former Waste Management NZ chief executive Kim Ellis, former Commonwealth Bank of Australia Chief executive Ralph Norris and corporate farmer Jim van der Poel.
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