Fonterra Shareholders Fund 'a clever scheme'
A Youtube video is doing the rounds at the moment of an experiment involving two capuchin monkeys.
At first, the monkeys are given a task and rewarded each with cucumber. Everything is hunky dory.
Then, the reward for one monkey is changed to grapes. This does not go down well with the grapeless capuchin. It throws the cucumber out of the cage in disgust and has a major tantrum. Unmistakably, its message is: "You can stuff your task where the sun don't shine. I ain't doing nothing without no grapes, fool."
You can imagine the outrage of a capuchin who didn't get an allocation of Fonterra stock.
Days before the stunning arrival of the Fonterra Shareholders Fund on the NZX, Chalkie heard grumbles about how little stock had been allocated to New Zealand retail and institutional investors.
Who got what was a closely guarded secret, but overall numbers released by Fonterra showed overseas institutional investors had received 42 per cent of the $525 million of units on offer. The balance went to local instos, clients of NZ brokers and "friends of Fonterra" who included staff and Australian milk suppliers.
At the offer price of $5.50, demand outstripped supply by a long way and there was a clear expectation that anyone who got their hands on some stock would make a killing.
And so it proved as buyers piled in on day one, pushing the price up to $6.85 at the close, on huge volume. The day's gain added about $125m to the value of the fund and about $2.2 billion to Fonterra's implied market capitalisation.
In just two hours, the value of trading in Fonterra Fund units exceeded the typical value traded on the entire NZX in a whole day.
This was a stockmarket debut with knobs on.
For comparison, Trade Me's first day on market a year ago generated about half as much volume, while Chorus, which opened a few weeks earlier, was a relative yawn at less than $20m.
In these situations, the upshot is what some people describe as a "transfer of value" - ie, the people who pay $5.50 get more value than those who pay $6.85. The question is, does it matter if 42 per cent of the value - about $50m, say - is transferred to foreigners?
One of the difficulties with this question is that the traditional share offer process is about as transparent as the bottom of an All Black ruck. All manner of murk can occur and no-one will ever be the wiser, particularly since those involved adhere to the code of what goes on tour stays on tour.
However, although we know investors generally got much less stock than they wanted, Fonterra won't say whether it applied the same scaling across the board or played favourites.
Chalkie reckons the latter is highly likely.
Among the rumours surrounding Fonterra's offer is talk of a blacklist carrying the names of institutions whose enthusiasm for the deal did not meet required standards.
When Fonterra was canvassing instos for their interest, it is said, some of the local feedback about the fund's governance was too candid for its liking. The foreigners, on the other hand, were apparently just happy to be involved.
Chalkie reckons there is some truth in this scenario, having overheard one of Fonterra's own local investment banking advisers describe the structure as "a dog".
Wellington-based fund manager Andrew Bascand has little time for the Kiwi worriers.
"Look at Trade Me," he says. "Priced at the top of the range. New Zealand investors - they played around, didn't really want to jump in. Global investors said ‘actually we understand this company, we want a slice of the action in Trade Me', and they'd done their work."
That's the question for the Fonterra issue, he said. "How many New Zealand investors have done enough work? You notice [AMP Capital head of equities] Guy Elliffe and myself weren't too worried. Well, maybe we did our work."
Thus, Fonterra would have allocated stock to investors who understood and liked the opportunity. Although many were from overseas, it seems many other foreign funds got zip.
So far, however, the only numbers Chalkie has seen on the breakdown have come from Australia, where the Australian Financial Review reported institutions got $300m, retail brokers got $125m and Friends of Fonterra got $75m.
If so, it would mean local institutions got about $100m, while overseas instos got about $220m. At that level you can see why some locals might be grumpy.
Before the units hit the NZX, one fund manager was expressing dismay that so much stock went overseas.
"With so much demand in New Zealand I can't understand why you'd allocate such a large proportion to overseas investors," he said. "It's disappointing from an NZ Inc point of view."
While fund managers tend to be interested in NZ Inc only as far as it relates to Me Inc, the remark has resonance when it comes to Fonterra because the big co-op owes its existence to the grace and favour of Parliament.
When Fonterra was formed in a dairy industry mega-merger in 2001, special legislation was required to control its domestic market power and avoid the competition concerns of the Commerce Act.
Debating amendments to the law in July this year, Labour MP David Parker made explicit reference to the national interest in Fonterra's future.
"This Parliament overrode New Zealand's Commerce Act in order to bring Fonterra into being," he said.
"We did that because we thought that there was a New Zealand interest that exceeded the domestic competition concerns. Since then, under this vertically integrated model, the interests of Fonterra and the farmers who own Fonterra and the country that benefits from Fonterra have improved, as it has been a very successful model."
Chalkie reckons Parker makes a fair point and Fonterra's indulgence of overseas investors is poor payback for the public support the co-op has had over the years.
True, once the stock is listed anyone is free to buy and sell, so there's nothing stopping the locals owning all of it if they want.
However, when demand was so strong for the initial offer, Fonterra's advisers would surely be aware that indicative pricing was attractive, that there was plenty of interest from NZ investors and that allocations amounted to a windfall.
It's probably just as well so few farmers sold into the supplier offer, because their sales would have effectively put money straight into the pockets of investors.
As it is, Fonterra has about $495m in cash it doesn't need after issuing shares to the fund. It aims to get rid of it by buying units on market during the next year or so.
In Chalkie's book, selling low and buying high isn't generally a profitable trading policy, but hey, no doubt Fonterra can afford to drop a few mill in the interests of priming the market.
In the long run, the new fund is part of a clever scheme which should release Fonterra from its co-operative chains and help it build a bigger, higher margin business. If it works, it will be good for NZ Inc.
However, the capuchins say NZ Inc could have done with a few more grapes.
- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.