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What you will pay for Fonterra's investment fund units

Fonterra has set an indicative price range of between $4.60 and $5.50 per unit for its $525 million investment fund, with an expected yield of between 4.2% and 5%. 

The global dairy giant, which is New Zealand's largest company, released its 170-page prospectus and investment statement for the fund today, which will give non-dairy farmers an opportunity to gain exposure to the co-operative's performance for the first time.

Fonterra says it wants to raise $500 million of units, with oversubscriptions of up to a further $25 million.

This will then allow Fonterra's 10,500 farmers to trade shares among themselves in a private market.

The indicative price range for the units is between $4.60 and $5.50, with the final price confirmed on or about the end of November, after a bookbuild with selected institutional investors and NZX firms.

Fonterra says the final price could be within or above the indicative range.

At the company's dividend forecast of 32 cents, the net cash, tax-paid yield of a $500 million fund would be between 4.2% and 5% per unit.

In that range, Fonterra's implied market capitalisation and pro forma net debt will be between $11.14 billion and $12.51 billion.

The company is forecasting a 10.6% increase in its 2013 profit to $690 million, while normalised earnings before interest and tax is expected to rise 5% to $1.08 billion.

Offers in the unit fund open in stages in early November, with pricing and allocations expected to be announced on November 27.

Economic rights – no votes

The Fonterra Shareholders' Fund is a unit trust which acquires the economic rights of shares and issues units to investors.

Investors have no voting rights at farmer shareholder meetings.

From November 2, Fonterra's farmers will be able to sell the economic rights to their "dry" shares and up to 25% of their "wet" shares – those allocated to farmers depending on the current and previous season.

Fonterra will issue units to make up any shortfall between what farmers sell and $500 million.

There is no general public offer, with investors having to buy units through a broker firm offer – available to New Zealand resident clients of NZX firms which receive an allocation.

There is also a stakeholder offer to "Friends of Fonterra Offer" for employees, sharemilkers and shareholders, and $25 million of units set aside for Australian shareholders.

The broker and stakeholder offers are expected to open early next month, while the institutional offer and bookbuild will occur on November 26 and 27, followed by an announcement of pricing and allocations.

Institutional offers will be made in Fonterra's key markets – New Zealand, Australia, Asia and Europe – but not the United States.

Trading of units on the NZX and ASX is expected to begin on November 30.

More by David Williams

Comments and questions
12

When will these units be admitted to Index.
If 90 days after listing, expect a big jump up in price

The yield seems low. I was expecting more than that. Will be interesting to read the prospectus.

Agree, the yield is low for an investment which does carry voting rights. Price range is higher than current Fonterra valuation of $4.52. And the dividends will likely fall if milk prices rise (seems counter-intuitive but the value-added component i.e. dividend tends to reduce as the milk price rises).

As you point out, the profitability of the units is influenced the most by the price of milk.

By setting the initial yield at such a low level, they are indicating that that is the range they expect it to be in. If Fonterra is more profitable in the future, what is to stop them attributing that to the milk price and not the value added (ie. the units)

In this case then, it will likely make a lot of sense to cry over spilled milk.

For those commenting on yield, here's a little extra: the range I've used in my story is the net cash yield. The FY13 gross yield is 5.8% to 7%. I hope that helps.

David, I see there is earnings growth expectations of over 10% for 2013. However, I haven't yet spotted earnings growth expectations in outlying years. Did they mention any figures for earnings growth (ideally EPS) beyond 2013?

Hi Aaron. Nothing beyond 2013 that I've seen. They're expecting to spend $506 million on dividends, or 32 cents per "share", in 2013. The big risks (+/- 10% of earnings), are listed as commodity price fluctuations, changes in the New Zealand milk supply (weather), and sales changes in Asia/Africa/Middle East.

Fonterra Bonds trade at 7.22% Yield, why on god's green earth would I want to take a less secured, non voting, no control, when the owner has the largest related party transaction of any company (the milk), when the milk price is not set by a market instead the Farmer controlled board and the then have my principal exposed to the movements of the market and an adjustable Divvy of just 5%.

I'll take the capital secured, coupon set Bonds every time....

Agreed.

Big big yawn.

Remember Dairy Equities a number of years ago? After the initial burst of activity from promotors and brokers talking up the issue, it listed and died a natural death as there's nothing to vote for or have any influence over as a unit holder.

Farmers are the worse shareholders you can team up with!

Go to hell all of you.
66 percent of the shareholding voted for this farce but still the company refuses to say how the vote went as in one vote -one farm.
It has been said as little 20 percent actually voted for this scheme.

it is fair to say CEO Theo Spiering has shareholder owners of the business, expecting him to deliver a milk price far better than the comparitives of NZ milk processors we saw season 2011/2012 . there will always be tension between milkprice and distributable dividend.having 11 candidates stand for Fonterra Director vacancies may see TAF voted out next AGM. that has always been the perogative of owners of the business who voted for TAF to see what is delivered that sits well with them when they gave up sovereighnty to pressures of corporate Fonterra.