Fonterra units stag 22 percent on debut, farmers less enthusiastic

Friday 30th November 2012

Fonterra Shareholders' Fund units soared as much as 22 percent on their NZX debut as investors leapt at the chance to get access to the dairy exporters' earnings stream, though no farmers used the scheme to trade their own shares.

The units jumped as high as $6.71 from the $5.50 offer price set in this week's book-build in a flurry of trading. The price settled back to $6.60, with 12.6 million units, or about 13 percent of the fund, changing hands.

"Today we have permanent capital based on a true market price," said Fonterra chief executive Theo Spierings."We have seen that true market price just now."

None of Fonterra's farmer shareholders used the mechanism to trade shares among themselves.

"Farmers will watch and see what happens. They have got a lot of time to make their decisions," said chairman elect John Wilson, who says he hasn't personally taken up units. Fonterra plans to make "another couple of offers to farmers in the new year" of shares. The details can't be made public yet.

Wilson says he expects the units "will settle down over time and end up trading on their fundamentals. But in the first flush of trading "we know there's been so much demand."

Fonterra chief financial officer Jonathan Mason said the new opportunities would let farmers trade their production shares, as spelled out in the prospectus, though the board has yet to decide on the detail.

Given the strong demand for the units Mason said Fonterra would consider a retail bond offer as existing debt matures. "Another retail bond is clearly one of the ideas we would look at as maturities come up," though he noted that in recent months they have offered more attractive interest rates.

Some 58 percent of the $525 million of units were allocated to New Zealand retail and institutional investors and the class of investors known as Friends of Fonterra, which includes Australia's Bonlac. The rest were sold to foreign institutions.

The change will substantially reduce the share redemption risk on Fonterra's own books, which has billowed to more than $700 million in recent years, by giving farmers a venue to trade the shares among themselves.

While the fund attracted massive demand, the pricing was deemed too rich for research firm Morningstar, which last week gave a 'do not subscribe' recommendation. Morningstar said investors would be better served waiting for the units to list and consider buying in if the price fell to $4.95.

BusinessDesk.co.nz

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