#TGD: Response delights Fonterra

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Fonterra chairman John Wilson has attributed a whopping $255 million premium on the value of Fonterra farmers’ shares in the past six months to the fact «the world has changed».
This follows Fonterra’s announcement that 20 per cent of its 10,500 farmer shareholders sold the economic rights to their milk supply shares to the Fonterra Shareholders Fund in last week’s supply offer.
At a purchase price of $7.92, the total value of the 75.22 million shares sold into the offer was nearly $600m.
Prior to units in Fonterra farmer-owned shares being publicly listed on the NZX and ASX in November, the shares were valued at $4.52 each. This was the «estimated fair value» set by Fonterra directors from a range recommended by an independent valuer.
The shares were set at this level while Fonterra underwent a major capital restructure called (share) Trading Among Farmers (TAF), which also ushered in the unit listings. The directors’ $4.52 freeze on the share value in the three years leading to TAF’s introduction added to the controversy over the scheme by wiping about $2 billion from the capital value of New Zealand’s biggest company.
Describing the 20 per cent farmer response as «great», Wilson said the discounted valuation followed the 2008 collapse of world equity markets.
«The world has changed,» he said.
Wilson said the supply offer final price of $7.92, which was the average price of units in the lead-up to last week’s offer, was «instructive, if you look at what global markets are doing at the moment».
That value being ascribed to the Fonterra share price loosely followed the track of other global food companies, he said. It reflected market attitude to Fonterra’s ability to provide future profits based on the wider market, and what multiples investors were putting on its cashflows.
«It’s normal investor behaviour. Yes, it’s a lot of movement [in the share price], but it’s in the context of a global market.»
The response to the offer exceeded the maximum of $475m Fonterra imposed, so acceptances will be scaled on a pro-rata basis.
The supply offer will not increase the current size of the Fonterra Shareholders Fund, the value of which leapt to $525m on listing day. Fonterra will buy the units that arise from the «wet» share offer and will redeem them for Fonterra shares.
«Wet» shares are those farmers must buy to support their average milk production for the past three years.
«Dry» shares are those held by farmers over and above wet shares.
Fonterra’s first supply offer to farmers got a tiny response. Wilson attributed the 20 per cent response last week to TAF having been operating for six months and farmers’ growing confidence in it, the need for cash after this year’s drought and mounting debt, and for funds to grow their operations.
«But we hear anecdotally that most of the interest was around growing farmers wanting to provide more flexibility for their businesses.»
Waikato University agribusiness professor Jacqueline Rowarth said many farmers would have sold into the offer because they were cash-strapped.
«They have high feed costs and two years of low payout. A lot are feeling the impact of costs around sustainability – they’re getting money out to put in feed pads and upgrade effluent ponds, rather than go to the banks.»
Rowarth predicted the strong share price could present Fonterra with a supply risk. Farmers would switch to processors that offered a higher payout and did not require them to buy shares. Fonterra shareholders were «gritting their teeth» hearing about their company’s investments in China and its programme to provide milk to schools, which would cost each farmer $2000 on average a year, while all the time the price they were being paid for milk was below the cost of production, she said.
 
Source: Stuff

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