Wednesday, July 6, 2022

‘Top line’ investors caused spike

Fonterra says its “top line” of new investors actually increased their stakes during a dramatic first afternoon of trading for the Fonterra Shareholders Fund (FSF) units.

That was a pleasing indication of long-term support for Fonterra, the co-operative said last week.

A substantial security holder notice by the Commonwealth Bank of Australia last week disclosed that it now has 7.43% of the fund units.

Fonterra explained that all investors, including CBA, were below 5% at allocation.

However Fonterra is not prepared to release any more details of the top 20 unit-holders register, and how it moved on November 30, after more than 25 million units or 30% of the initial offering changed hands.

“In anticipation of the expected strong demand, investors were tiered based on their quality, understanding of Fonterra and their involvement in the process and the quality of the bid.” – Fonterra

Fonterra executives, dairy farmers, investors and market regulators watched in amazement as the units listed at $5.50 immediately jumped to $6.60 and then made a series of smaller increases to $6.85.

Throughout the afternoon more than 1000 investors sold a total of 25 million units and made more than 20% return on their brief ownership period.

These early sellers are called “stags” in market parlance and their selling frenzy may have been a result of the 20% price gain available on what was the widespread view that the underlying value of Fonterra was nearer $5.50 per unit and share.

But for every high-priced seller there had to be a keen buyer, presumably from among the ranks of potential investors who missed out on unit allocations or were scaled back below their intended investment levels.

When Fonterra reports its interim results next February the register report should give an indication if the 42% overseas ownership of FSF units when issued has decreased or increased.

Since the hectic launch several interested parties and commentators have claimed the initial public offer (IPO) was mismanaged.

Although the Fonterra directors responded to the depth of investor interest by going to the top of their indicated price range, that proved to be more than $1 below the opening price.

Directors had reserved the right to go higher than the indicated range, but did not use it. They would also have access to numerous valuations of the co-operative, of which the average must have been close to $5.50.

The co-operative’s decision to allocate 42% of units to institutional investors offshore has also been strongly criticised, as NZ retail investors were substantially scaled back to as low as 10% of their applications.

Northland dairy farmer Matt Long called the TAF launch a hundred million-dollar bungle.

“In effect, shareholders have given up $100 million of capital to outside investors, and 40% of it has gone overseas,” he said.

“As farmer-shareholders are forced to tighten our belts during a low payout year we expect to see accountability from the Fonterra board for a monumental balls up.”

Long also observed that market-value shares now again cost more than the milk price.

“With unknown restrictions on the ability for shareholders to exchange shares for cash and vouchers from the shareholders’ fund it appears that growing supply will be a more difficult proposition than in the past.

“It certainly makes a switch to independent processors look more appealing in regions where that option is available,” he said.

In reply Fonterra claimed a rigorous process was used to inform the indicative price range of the units, with multiple advisors, independent valuations and benchmarking against similar companies and co-operatives around the world.

Leading up to the book-build, when institutions and NZX firms were invited to bid for the units, Fonterra conducted more than 200 presentations, and it retained an independent financial adviser, Rothschild.

“In anticipation of the expected strong demand, investors were tiered based on their quality, understanding of Fonterra and their involvement in the process and the quality of the bid.”

But Fonterra would make no comment why 30% of those investors bailed out immediately.

Market operator NZX said that relative to the size of the IPO, it was the most value traded ever on the NZ market in a first day of listing.

NZX CEO Tim Bennett said the innovative design of the Fonterra Shareholders Market/Fund would be an example to other NZ businesses which wish to raise capital while retaining the original ownership and control.

He hoped the demand for Fonterra units showed a “generational change” towards New Zealanders again being savers, investors and providers of business capital.

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