First NZ Capital, its overseas affiliate Credit Suisse, Deutsche Bank and its 49.9% owned Craigs Investment Partners have won plum advisory roles from Fonterra as the giant dairy co-operative moves to create a shareholders' market.
Fonterra’s farmer shareholders voted overwhelming in support of the group’s proposal to develop trading among farmer members on June 30. In a historic move, the successful vote will change Fonterra's capital structure ending years of debate about whether outside investors should be able to buy into the co-op.
Fonterra is taking this step as it strives to reduce redemption risk, or the need to pay cash out to farmers quitting the co-op or reducing their milk supply. Fonterra says this will stop money washing in and out of its balance sheet from season to season and provide permanent capital to grow returns.
The plans include roles for one or two financial institutions to act as registered volume providers, or market makers, to offer a spread offering to buy or sell Fonterra shares. These entities would buy and sell shares in a similar way that banks buy and sell foreign exchange, with Fonterra setting their charges. Fonterra says, however, First NZ-Credit Suisse and Deutsche Bank-Craigs Investment Partners' roles are purely advisory at this stage.
Fonterra chief financial officer Jonathan Mason said Fonterra had used external advisors to assist it in developing the initial proposal for farmer trading, in particular to support the goal of a deep and liquid market for the trading of Fonterra shares among farmer-shareholders.
Mason said Fonterra would be “accessing professional advice” from a range of advisers as it moves towards introducing farmer trading.
“This specialist expertise will be essential as the co-operative develops the technical details for a new Fonterra Shareholders’ Market and Fonterra Shareholders’ Fund,” said Mason.
Fonterra has said the market makers won’t have full ownership rights when holding the shares, but will have access to dividend flows and be exposed to rises or falls in the shares. Fonterra says it will control the size of the spread offered with the shares held in the equivalent of trusts.
Fonterra Shareholders Fund
The plans also call for the creation of a Fonterra Shareholders Fund to help farmers buy and sell shares. It would also be open to outside investors. The Fund would raise the money it needed to pay farmers by selling investment units. This would open up some form of investment in Fonterra to the general public for the first time and raises the prospect of units in the Fonterra fund being traded on the NZX.
The Shareholders Fund would buy rights to dividends from the shares. This fund would, however, allow non-farmers to buy into the fund as it will be a unit trust open for investment generally. It would target "friendly investors" such as sharemilkers and retired farmers, but institutional investors and the public would also be able to participate. Unitholders and the Fund would not have any voting rights in the co-op with only shares backed by milksolids holding voting rights.
Fonterra has said farmers could buy up to two times their annual production in 'dry' shares, which are shares not backed by milk production. But Fonterra said it would cap the total number of 'dry' shares at 20% of the total number of shares. Fonterra has set a dividend payout policy of 65-75% of operating profit, which means capital retention of 25-35% of profit.
Fonterra’s existing share trading amounts to between NZ$400 million to NZ$1.1 billion a year, with between NZ$2 million to NZ$5 million traded daily.
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