Fonterra shares in hot demand, despite unknowns

TERRY HALL

Last updated 05:00 05/11/2012

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OPINION: Dairy farmers should be very, very happy. It seems heaps of Asians, Australians and Kiwis want to invest in their now highly desirable, fashionable industry, even if many haven't a clue precisely what they are putting their money into.

Even well-tested professional investors are finding the prospectus and the concept behind the $525 million Fonterra Shareholders' Fund tough to get their heads around. It is essentially an untried investment, the first of its type ever unleashed anywhere. Essentially, owners of the co-operative company will retain full control while opening an investment opportunity to outsiders. This is to provide additional finance to further expand a crucial part of their business, which the farmers seem reluctant to do themselves.

While described as a unit trust, the units resemble a normal share. Unlike other companies listed on the NZX, investors will have no say in the running of the company. They will not have legal title and directors will not be answerable to them: thus they will not get letters each year asking them to vote for directors. These rights are retained by dairy farmers who get the full milk pay-out from Fonterra.

Many seasoned investors worry about this - arguing that it is poor practice and mumbling darkly that it leaves the share price open to undue influences including the endless political infighting in the industry.

But it hasn't cooled interest in the issue. Some smaller shareholders in other NZX-listed companies must feel they don't have any real say in how their companies are run anyway.

Chances are, many intending applicants will be disappointed. Organisers seem to have grossly overcooked the publicity - meaning demand is expected to greatly outstrip supply. A senior financier said: "It is becoming as over-hyped as the AMP issue", referring to the intense demand when the AMP was demutualised in 1998 and those shares initially traded at more than $30 before slumping as expectations failed to be met.

Only clients of the bigger broking firms are likely to get a shot at buying units: though they are unlikely to be allocated anything like the number they apply for. Some may get none at all, as will people who trade through smaller broking firms and discount brokers. Adding to the competition, Fonterra is encouraging sharemilkers and other industry players, including farmers, to buy units.

Compounding the problem is that Fonterra and its advisers have been whipping up strong interest at investor road shows in Australia, where it will be listed on the stock exchange, and Asia.

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There seems to have been no need to promote the issue internationally and pay dividends to offshore investors. Such is the amount of investment money sloshing round in New Zealand we could easily have filled it ourselves. Financial gurus justify the heavy overseas promotion as the need to "deepen the liquidity pool".

While, reportedly, some institutions won't invest because they regard the prospectus as too complex and difficult to fathom, others will do so, adding to the unprecedented amount of money in this country looking for a good return. Last month, more than $800m was injected into the economy from maturing fixed interest investments where investors were not given the chance to reinvest.

This month a further $1.03 billion becomes available. This includes $350m from GPG bonds, $150m from Prime and $370m from ASB. The headache for investors is that there have been few other investment opportunities this year: The finance company sector has largely disappeared. It is difficult to recall a period when there were so few company fixed interest bond issues or share floats.

Much of this $1.8b being released in this two-month period is probably being invested in the commercial banks, though some may have gone to housing.

The $525m being sought (including $25m in oversubscriptions) is tiny. Back in 2007 - before the global crisis hit - Rabobank alone raised $900m in a single bond issue.

The forecast gross distributable yield on this issue of between 5.8 and 7 per cent looks comparatively attractive, especially for investors who see it as gaining an exposure to the dairy industry with its promising future - especially in Asia where there is a fast-developing appetite for its products. While there is not tax imputation on the units, they are rated as PIEs. This means Fonterra pays the tax and holders shouldn't need to pay further tax on dividends received.

The $525m being raised is seen as a first step; eventually this fund could grow to a multibillion-dollar company as both farmers and the public buy in. The fund is limited in size to 20 per cent of Fonterra to ensure it can never take over the parent co-op. While many farmers say they will not sell shares to it, cynics say that they will quickly realise it represents a valuable cash management option.

Farmers may wonder why they would pay 10 per cent on their farm mortgages when this fund may return, say, 6 per cent. They could become keen traders as they will have a better feeling on the likely milk pay-out than non-farming investors.

The units could be subject to considerable price volatility. They should mirror the price of the Fonterra farmer-only shares, which are subject to uncontrollable global events and markets.

- BusinessDay.co.nz

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