Fonterra Shareholders' Unit IPO explained: a new model for co-operatives

Author: Ashley Lee | Published: 12 Dec 2012
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The Fonterra Shareholders’ Fund IPO on the New Zealand stock exchange (NZSX) and Australian stock exchange (ASX) was linked with the debut of the Fonterra Shareholders' Market in a transaction that could foreshadow initial public offerings (IPOs) by similar co-operatives. Here’s why

Fonterra is New Zealand’s largest dairy co-operative. Suppliers to the company must also be shareholders, but the company wanted a solution in which outside investors could receive economic benefits but could not become shareholders. Its unique corporate structure necessitated a bespoke innovative structure for the Fonterra Shareholders’ Fund IPO and the Fonterra Shareholders’ Market.

The transaction represents the largest IPO out of Australia and New Zealand this year and required close cooperation with regulators.

Russell McVeagh’s Graeme Quigley, who represented Fonterra, explained that the structure incorporated two linked elements: the Fonterra Shareholders’ Market – the 'private' market created for Fonterra shareholders to trade shares – and the Fonterra Shareholders’ Fund.

“The Fonterra Shareholders’ Market is quite unique in New Zealand terms," he said. "The process for its establishment was similar to setting up a new exchange, with the same regulatory oversight."

Bell Gully partner James Gibson, who advised joint lead managers and bookrunners Deutsche Bank, Craigs Investment Partners, Goldman Sachs and UBS said that the objective of the deal was to move the capital redemption risk for Fonterra. Farmers in the Fonterra co-operative are required to hold a certain number of co-operative shares in Fonterra for each kilogram of milk solids supplied each year to Fonterra.

The transaction reduces the risk that Fonterra would have to use large amounts of capital each year to redeem co-operative shares from farmers when farmers’ milk production dropped, or when farms ceased being dairy farms.

Achieving the deal objective involved three key elements. Amendments were made to relevant legislation and Fonterra’s constitution to remove redemption obligations. Constraints were also placed on farmers trading Fonterra shares between themselves.

That resulted in the creation of a trading market – the Fonterra Shareholders’ Market on the NZSX – for Fonterra shares that allowed farmers to trade Fonterra shares between themselves.

Then there was a NZ$500 million public offer of units in a unit trust, listed on both NZSX and ASX. These units were backed by economic rights attaching to a pool of Fonterra shares, thereby giving institutions and the general public the ability to obtain an investment that has exposure to Fonterra.

But it is important to note that investors into the Fonterra Shareholders’ Fund lack voting rights.

Quigley said on one level, the fund was not unusual in the sense that it’s a unit trust with units listed on the NZX. "There are a number of other unit trusts listed on the NZX, but the terms of this unit trust are highly customised," he said. "The key feature is that each unit is designed to pass through to the unit-holder the same economic benefits as would be received by a Fonterra shareholder."

Farmers and Fonterra can exchange their Fonterra shares for units and vice versa.

Moreover, the structure also required the creation of the role of a market maker, or 'registered volume provider', which is a third-party organisation.

“It is charged with providing enhanced liquidity to the shares traded on the Fonterra Shareholders' Market and to actively trade the shares," said Quigley. "In New Zealand, there are no market markers in any other stock."

This was a unique structure dealing with a relatively unique redemption risk issue.

Nonetheless, where such a redemption risk issue exists in other cooperatives, Gibson expected those co-operatives to have a close look at the structure off the back of this transaction. "A lot of planning and thought by Fonterra and its advisors went into this innovative and complex structure," he said.

Gibson was optimistic the deal would have a positive impact on New Zealand capital markets. To see this transaction get away, and get away well – oversubscribed and then the units trading at a premium – is a very good result for the New Zealand capital markets and hopefully will give other issuers confidence to follow suit, he said.

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