Sunday, July 3, 2022

TAF ready to roll

Sir Henry van der Heyden and Theo Spierings at Fonterra’s annual result announcement. Fonterra’s brave new world of share and unit trading was described in telephone book-sized documents released on Friday.

Milk supplying shareholders have an initial opportunity to sell the economic rights of up to 25% of their wet shares for about $150,000 in capital (for the average-sized farm), which they might apply to other purposes.

It is a flexibility of choice over part of their share capital they have not had before.

They would be forgoing a forecast 32c/share dividend in the 2012-13 season or $10,000 income and any potential upside in the share price.

That share price will be set free from its current peg of $4.52 and Fonterra and its advisers have indicated a price range of $4.60-$5.50.

However, the final price will be set by the board on November 27 after all potential investors have made their bids for the $500 million worth of units to be offered.

There are four categories of investors – investors through NZX broking firms, Friends of Fonterra, Australian farmers through Bonlac Supply Company and institutions, both here and overseas.

The friends of the Fonterra family includes supplying shareholders, sharemilkers, former shareholders who retired during the past five years and permanent Fonterra employees in Australia and New Zealand.

However, the proportion of units reserved for this family of investors has not yet been disclosed and will be part of the final price-setting discussion by the board on November 27.

Chief executive Theo Spierings said from talking to potential investors over recent times he was confident subscriptions for $500m of units would be received during the next month.

But will there be $500m of economic rights placed on the market by Fonterra's 10,500 farms? That is the big unknown in this TAF launch.

The co-operative will issue shares to make up any shortfall. To reduce share redemption risk, Fonterra is prepared to "make the market", whatever the requirement, chairman Sir Henry van de Heyden said.

If it has to create the full $500m new capital that would dilute the projected earnings a share by only one cent in 2012-13.

He said Trading Among Farmers (TAF) is long overdue and will be unique among dairy co-operatives around the world as the formation and capital structure itself was unique in 2001.

"TAF will provide permanent capital and reduce redemption risk while preserving and strengthening 100% farmer ownership and control," he said.

"The unit fund provides a unique opportunity for the public to gain exposure to the financial performance of Fonterra and the global dairy industry."

Both Fonterra shareholders and unit holders will invest through separate structures and have in common the chance to be part of NZ's success story.

Fonterra is the world's largest dairy processor with an annual milk intake of 21 million tonnes, compared with 17 million tonnes for Dairy Farmers of America.

It has a 21% share of global dairy exports and 45-50% of whole milk powder and butter.

Exporting 95% of its dairy production, NZ is very well placed to address the growing imbalance between dairy supply and product demand, Spierings said.

Contained within the TAF offer documents are forecasts for the financial year to July 31 2013.

It expects revenue to fall somewhat to $18.6 billion (due to lower prices) but the earnings before interest and tax (EBIT) to increase 7% to $1.08b.

Profit will also rise about 10% to $690m and earnings a share stay around 42c/43c.

Therefore the directors expect, in accordance with their dividend policy, to be able to pay 32c a share dividend, 14c as interim and 18c final.

These numbers generate 6-7% gross yield on farmers' shares and on investment units, or 4-5% with taxation fully imputed.

Large numbers of retail and institutional investors are expected to line up for a chance at this fairly gilt-edged investment.

van der Heyden said $4.60, the bottom of the share price indicator, was "our line in the sand" below which the directors were not prepared to sell any shares.

The price range had been determined by both internal and external valuations and probably contains a discount because farmers retain 100% control.

"TAF is not about raising capital for the co-operative but making our capital permanent," he said.

"We are confident that our dividend retention policy and this new permanence over capital will meet our requirements for growth ambitions in the near future."

Spierings said the new capital structure put a floor under his new strategy, "on which we can deliver".

Half of the annual profit is generated from commodities and ingredients in the NZ Milk Products part of the business.

This also drives the milk price, which makes the greatest part of farmers' payments.

The profit margin on this activity is expected to be 3.7% in FY2013, he said.

The regional businesses are largely added value and branded products and these have been forecast to generate margins between 6% in Australia and NZ, 11% in Asia and the Middle East and 14% in Latin America.

Fonterra's farmers have all been posted a copy of the Supply Offer Document, which they use if they want to sell economic rights to some of their shares.

It contains various scenarios to guide thinking and decision making and the consequences of making sales.

The share standard will in future be based on a three-year rolling average of milk production.

Intending investors need to get hold of the large Fonterra Shareholders' Fund Prospectus and Investment Statement through their share broker.

After planning and discussing TAF for five years, the timetable for implementation is now tight.

Farmers wanting to sell economic units have until November 21. Friends of Fonterra and general investors through NZX firms have until the same date.

Then the institutional offer will be open for five or six days and pricing and allocations will be announced n November 27.

Unit trading on the NZX and ASX is expected to begin on November 30.

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