Inside Fonterra’s dairy float deal
A two-year journey began with holiday jottings, writes Stephen Shore.
A FEW days before Christmas 2009, dairy executive Alex Duncan stopped by the Auckland Airport bookshop at the start of his holiday and bought an orange A4 exercise book.
Duncan, the general manager of strategy and economics at Fonterra, the fourth-biggest dairy company in the world, had a lot on his mind. His wife was worried he would be mentally absent for most of the trip, so he promised to buy the notebook so he could jot down ideas and then forget about them. He and his wife were about to board a plane to Hawaii to spend the holidays with his daughter and son-in-law.
Executives at the $10 billion
Disaster struck . . . Fonterra suddenly had to find $700 million.
Fonterra had been trying to change its capital structure ever since it was formed from the merger of the Dairy Board, the New Zealand Dairy Group and the Kiwi Co-operative Dairies in 2001.
Fonterra was wholly owned by a co-operative of New Zealand dairy farmers, who were required to hold at least one share for every kilogram of milk solids they supplied, known as wet shares. Farmers could hold extra stock, known as dry shares, but these did not pay dividends.
There was a short window each December when farmers could trade their shares at a price determined by an independent body. When the economy was booming and farmers produced more milk, they had to buy more shares. But when things cooled off they didn’t always sell, so most farmers held more shares relative to the volume of milk they supplied.
Fonterra acted as a market maker between trading farmers. Its capital base often rose or fell as much as 5 per cent in any year, depending on whether more farmers bought or sold shares. This made it difficult to plan capital expenditure to grow the business.
In 2007, Fonterra and its adviser, Deutsche Bank, raised the idea of a part float, listing 40 per cent of the company on the New Zealand Stock Exchange. But the farmers would not give up any control, fearing non-farmer shareholders would try to improve margins for themselves by pushing down the milk price paid to farmers. They also feared the company might fall into foreign hands, as had happened with the Kerry Co-op in Ireland.
Then, in December 2008, disaster struck. Farmers feeling the pinch of the financial crisis rushed to redeem their extra shares. Fonterra suddenly had to find $700 million to buy back stock. It had cash on its balance sheet but was forced to raise $300m.
It was obvious the structure had to be changed, urgently, but it wasn’t until Duncan was on holiday in Hawaii a year later that the seeds of a workable solution began to form.
On his return in January 2010, the Fonterra strategy team of Duncan, Abhy Maharaj, Mike Cronin and Jonathan Mason met regularly at the company’s Auckland headquarters.
The rest of the office staff were still on holidays, so the team of four turned up in T-shirts and sandals to toss around ideas.
Duncan brought out the orange notebook. What if they could create a fund without voting rights for non-farmer shareholders? Farmers could trade their shares with other farmers or with nonfarmer shareholders on the exchange at a price determined by the market, shifting the redemption risk to investors and off the Fonterra balance sheet.
The strategy team called Deutsche Bank’s Mike Roche and Brett Shepherd to see if it was possible. Nothing like it had been tried before but the pair were willing to give it a go. The plan became known as Project Hawaii.
Getting the structure of the Fonterra Shareholders’ Fund right would take nearly two years. It would have to appease the New Zealand government, regulatory authorities, dairy farmers and Fonterra’s conservative board, while also appealing to New Zealand retail investors and overseas fund managers. It would need to raise at least $500m to be liquid enough to be representative of the underlying $10 billion co-operative.
Goldman Sachs, UBS and Deutsche Bank with its New Zealand affiliate Craigs Investment Partners each won a
Players in the Fonterra deal
ALEX DUNCAN
General manager of strategy and economics, Fonterra
SIMON COX
Head of equity capital markets, UBS
MICHAEL EVERETT
Head of equity capital markets, Goldman Sachs
BRETT SHEPHERD
Chief executive, Deutsche Bank AG New Zealand role on the capital raising, with the heads of equity capital markets in Australia teaming with their opposite numbers in New Zealand: Goldman had Mike Everett and David Goatley; UBS Simon Cox and Mark Pearce; and Deutsche Bank Hamish Whitehead and Shepherd.
Since May, the Australian bankers have been on the ground in Auckland twice every three weeks. There were four global roadshows and more than 200 meetings with potential investors. One of the biggest challenges was convincing investors to buy a stake in a company they would have no control over: about 20 per cent of fund managers canvassed turned down the offer for that reason.
But many more believed in the growing Asian demand for dairy products.
The capital raising was heavily oversubscribed and Fonterra Shareholders’ Fund listed on the NZX on Friday last week.
Shortly after the open it soared 26 per cent to close at $6.92.
Duncan’s Hawaiian daydreams had become a reality.