Fonterra units set for bright debut after big demand

The price is expected to go up on listing on Friday, as farmers cling to holdings, reports Andrea Fox. 

The countdown is on to what could be a sparkling debut of Fonterra units on the NZX on Friday, after strong demand drove the final price to $5.50 a unit, the very top end of the IPO prospectus range.

The price and allocations were announced by Fonterra last evening after parties submitted their bids on Monday and yesterday.

About 7000 retail and institutional investors rushed to secure units in the new Fonterra unit trust fund, to be called the Fonterra Shareholder Fund.

It is the non-farming public's first opportunity for an investment taste of New Zealand's biggest company, a farmer-owned co-operative. About 2500 units were also allocated to Fonterra stakeholders.

A market source who asked not to be named predicted the unit price would "go upwards" on listing.

"We've always thought it was priced too low. . . . My personal view is they'd probably have been able to get another 50c and still have it oversubscribed.

"It's very unusual having an issue in which price maximisation isn't the main driver, which is probably why they got such a low take-up from the farmers.

"The fact there weren't many willing to sell [economic rights to their shares into the fund] probably tells you they thought it was worth more."

As a result of the strong public interest, the unit trust fund would be launched at a size of $525 million, Fonterra chief executive Theo Spierings said.

Dairy industry legislation covering Fonterra, which controls about 90 per cent of New Zealand's raw milk supply, required the fund to be a minimum of $500m.

But because of low farmer-shareholder interest in selling the economic rights to their shares into the fund through the IPO-associated Fonterra "supply offer" last week, Fonterra will have to issue 90 million shares to support the fund size of $525m.

Only 900 of Fonterra's 10,500 shareholders opted to sell into the fund.

The share issue will dilute Fonterra's earnings per share by about 1c.

Fonterra would not disclose the dollar value of the 90 million shares, but given the price of farmers' shares is expected to track the unit price at $5.50 a share the value is $495m.

Fonterra said 58 per cent of units had been allocated to New Zealand retail and institutional investors, as well as to what the IPO called Friends of Fonterra - its farmer-shareholders, staff, sharemilkers, former shareholders and Australian Bonlac suppliers. The remainder of the units have been allocated to overseas-based institutions.

The initial fund size of $525m meant Fonterra could allocate all requested units to the 2500 "friends" who applied.

Fonterra would not disclose what overseas institutions had received units, or whether any went to a Chinese state agency Fonterra representatives are reported to have had IPO talks with.

The Wall Street Journal reported from Beijing earlier this month that the China Investment Corp, an investment institution and wholly state-owned company of the People's Republic of China, was eyeing a stake in Fonterra's new unit fund.

Fonterra chairman Sir Henry van der Heyden said the final unit price was positive for the share price of farmer-shareholders.

Fonterra's share price has been held by directors at $4.52 for over a year in preparation for trading among farmers.