Fon­terra: Trims pay­out Puts Tip Top up for sale

The New Zealand Herald - - The Business - An­drea Fox

Six years ago this week, when the first trade of Fon­terra shares on the NZX went through at $6.66, a re­port­edly de­lighted thenchief ex­ec­u­tive Theo Spier­ings joked “666 means some­thing to some peo­ple but I hope it doesn’t for our shares”.

Now $8 mil­lion man Spier­ings has gone (not soon enough for many), Fon­terra’s share price of $4.70 is no one’s idea of a joke, and after mixed re­ac­tion to the big dairy com­pany’s lat­est mar­ket announcements as it tries to soothe con­cerns about its stretched bal­ance sheet and debt, it seems the devil is in­deed lurk­ing, en­sur­ing no one is happy.

Fon­terra’s iconic ice­cream maker Tip Top is of­fi­cially on the block. No sur­prises there.

In­her­ited through the in­dus­try mega-merger that cre­ated Fon­terra in 2001 un­der spe­cial en­abling Labour Party leg­is­la­tion, Tip Top was picked as the first as­set to go when Fon­terra re­cently de­clared a $196m net an­nual loss, the first in its his­tory, and debt of $6.2 bil­lion.

Tip Top, founded 70 years ago, is as Kiwi as jan­dals. Maybe it launched the in­ter­na­tional mod­el­ling ca­reer of Rachel Hunter.

Pub­lic re­ac­tion to con­fir­ma­tion of the much-tipped sale was swift — an on­line Save Tip Top pe­ti­tion.

That was pre­dictable. Not so was the re­ac­tion of the coun­try’s big­gest dairy farmer, Fon­terra share­holder Colin Armer.

The former Fon­terra di­rec­tor said as­set sales while the board was still promis­ing div­i­dends was a no-go.

His in­flu­ence sug­gests he was speak­ing for many share­hold­ers.

Share­holder frus­tra­tion at Fon­terra’s fi­nan­cial per­for­mance spurred an un­prece­dented rout at re­cent di­rec­tor elec­tions — but ap­par­ently that anger doesn’t ex­tend to a de­sire to sell as­sets willy-nilly.

“Is it good gover­nance prac­tice when you have a stressed bal­ance sheet to be selling as­sets in­stead of with­hold­ing div­i­dends?” asked Armer, re­peat­ing a ques­tion he asked at the em­bat­tled co-op­er­a­tive’s an­nual meet­ing last month.

Fon­terra’s stretched bal­ance sheet is partly at­trib­uted to hav­ing no firm earn­ings re­ten­tions pol­icy.

It has been pay­ing out most of its op­er­at­ing earn­ings to farm­ers.

Maybe be­cause its bal­ance sheet is un­der the na­tional and mar­ket spot­light, Fon­terra seemed to make an ex­tra ef­fort in its De­cem­ber 6 mar­ket up­date to be more de­tailed than usual about its first quar­ter per­for­mance, while an­nounc­ing a very pre­dictable cut in its milk price fore­cast.

Dis­ap­point­ingly for Fon­terra bosses, the mar­ket re­cep­tion to the per­for­mances of its var­i­ous di­vi­sions was “soft, soft and soft”.

Which brings us again to the Tip Top ice­cream sale.

Fon­terra has ex­pressed a de­sire to keep the com­pany in New Zealand.

Craigs In­vest­ment Part­ners’ prin­ci­pal Mark Lis­ter isn’t tak­ing bets on that. He thinks there will be big in­vestor and in­vest­ment com­pany in­ter­est in a sale.

That could be a trade sale but there’s also the pos­si­bil­ity of Tip Top be­ing of­fered in an IPO.

That said, there’s bound to be re­sis­tance in the Fon­terra share­holder base to the com­pany giv­ing away its frag­ile claim to be­ing a value-added busi­ness if it sells Tip Top.

Which brings us to a line in Fon­terra’s sand.

It needs to tell us — asap — if its brave re­view will lead it to pledge to con­tinue be­ing a highly ef­fi­cient and prof­itable pro­ducer, man­u­fac­turer and ex­porter of top qual­ity com­mod­ity prod­ucts for the world’s food and nu­tri­ent man­u­fac­tur­ers — or a wanna-be Nes­tle with­out the funds.

The drought of new list­ings on the NZX looks set to last a lit­tle longer, with a pre-Christ­mas de­but for ar­ti­fi­cial in­tel­li­gence com­pany Ar­ria NLG now off the ta­ble.

The com­pany, which spe­cialises in ar­ti­fi­cial in­tel­li­gence that can read data and con­vert it into lan­guage, had hoped to list in the fourth quar­ter of this year.

“It ap­pears we are not go­ing to be able to pull ev­ery­thing to­gether for Ar­ria be­fore Christ­mas, so the NZX list­ing will now be done in the first quar­ter of 2019,” CM Part­ners prin­ci­pal Tim Pre­ston said in an email to the Her­ald.

“There has been a lot in­volved with mov­ing the com­pany from the UK to New Zealand and co-or­di­nat­ing ev­ery­thing such as au­dits across three dif­fer­ent ju­ris­dic­tions,” he said.

Ar­ria, which de-listed from Lon­don’s Al­ter­na­tive In­vest­ment Mar­ket in 2016, plans to de­but in New Zealand as a so-called “com­pli­ance” list­ing, which en­tails the list­ing and quo­ta­tion of ex­ist­ing se­cu­ri­ties with­out rais­ing fresh cap­i­tal.

The com­pany, which has his­tor­i­cal links to the now de-listed

Dili­gent Board Mem­ber Ser­vices ,is also look­ing at new tech­nol­ogy as a source of fund­ing, such as dis­trib­uted ledger tech­nolo­gies as­so­ci­ated with blockchain, and dig­i­tal se­cu­rity tokens used in crowd­fund­ing.

Ar­ria NLG — for nat­u­ral lan­guage gen­er­a­tion — is headed up by Sharon Daniels, a co-founder and former ex­ec­u­tive di­rec­tor of Dili­gent, which delisted in 2016 after it was bought by

In­sight Ven­ture Part­ners.

Ar­ria has about around 300 share­hold­ers, many of them New Zealan­ders and many of them former Dili­gent share­hold­ers.

CM Part­ners is act­ing as the cap­i­tal mar­kets ad­vi­sor and NZX spon­sor for the list­ing. The NZX has seen just one new eq­uity ad­di­tion this year — QEX Lo­gis­tics’ com­pli­ance list­ing in Fe­bru­ary.

Shades of grey

If Oc­to­ber wasn’t ex­actly a Black Oc­to­ber on the mar­kets, it was cer­tainly 50 shades of grey.

Big falls were mea­sured on global mar­kets and in New Zealand, the NZX was down more than 5 per cent for the month.

Mil­ford As­set Man­age­ment se­nior an­a­lyst Frances Sweet­man said Oc­to­ber was a very dif­fi­cult month. Novem­ber was not flash ei­ther.

“For us, the driver is very clear — we’ve got very high val­u­a­tions, mon­e­tary pol­icy is be­com­ing less ac­com­moda­tive as the US raises in­ter­est rates, and then in­vestors are be­com­ing in­creas­ingly con­cerned that the global econ­omy is start­ing to slow.”

So, is grey the new black for the mar­kets?

“It’s hard to see a very strong per­for­mance from the share­mar­ket go­ing for­ward. But it’s dif­fi­cult to have the con­fi­dence to say we have a lot more Oc­to­bers on the hori­zon be­cause there are two things play­ing off here,” Sweet­man says.

“On the one hand, our lo­cal in­ter­est rates are still low and are due to stay low.”

Eco­nomic growth is still good and com­pany earn­ings are still ro­bust.

“But, on the other hand, val­u­a­tions are still high and it looks like the out­look is be­com­ing less at­trac­tive. So, as those two things play off against each other, we’re bound to see more volatil­ity. It’s not a case of the share­mar­kets fall­ing for no rea­son.”

Look­ing ahead, in­vestors have had a very good cou­ple of years and the next few years of re­turns are prob­a­bly not go­ing to be as good. But that’s no cause for alarm, Sweet­man says, pro­vided peo­ple in­vest ac­cord­ing to their risk pro­file and that they can take a medium-term view.

Takeover ter­ri­tory?

Fletcher Build­ing’s share price plum­met last month, after rev­e­la­tions of an­other un­ex­pected profit down­grade, has some won­der­ing if it is now a po­ten­tial takeover tar­get.

Fletcher shares sunk to $4.60 on Thurs­day last week — two days after its dis­as­trous an­nual meet­ing and down­grade an­nounce­ment.

That’s the low­est the price the shares have closed at since July 2004 — three years after Fletcher Build­ing was split off from Fletcher Chal­lenge.

Daniel Kieser, man­ag­ing di­rec­tor of ShareClar­ity, says Fletcher Build­ing’s share price is now trad­ing be­neath its book value.

“At some point it could be­come an ac­qui­si­tion tar­get.”

Kieser sug­gests po­ten­tial buy­ers could in­clude state en­ter­prises like China Com­mu­ni­ca­tions Con­struc­tion, China State Con­struc­tion or China Na­tional Build­ing Ma­te­ri­als.

“They each have op­er­a­tions in New Zealand and may want more ex­po­sure to the in­fra­struc­ture and hous­ing mar­kets.”

And they have deep pock­ets with China State Con­struc­tion hav­ing $60 bil­lion cash on its bal­ance sheet and China Com­mu­ni­ca­tions Con­struc­tion with $8b cash.

Kieser said other po­ten­tial buy­ers may in­clude con­struc­tion com­pa­nies look­ing to di­ver­sify their in­ter­ests like Hochtief which owns CIMIC in Aus­tralia or VINCI, own­ers of HEB Con­struc­tion in New Zealand; or global pri­vate eq­uity firms like Bain Cap­i­tal, Hell­man & Fried­man or the Car­lyle Group who have in­vested in un­der­val­ued/turn­around Aus­tralian com­pa­nies in the past.

Given Fletcher’s down and out sit­u­a­tion it’s hard to know if share­hold­ers would wel­come a bid­der as a white knight or see it as op­por­tunis­tic.

Build­ing con­sent data out this week showed con­tin­ued strength in do­mes­tic con­struc­tion ac­tiv­ity, yet Fletcher’s share price has strug­gled.

“Fletcher Build­ing’s share price is cur­rently be­low where it was in the depths of the GFC,” NZ Funds se­nior port­fo­lio man­ager Josh Wil­son said.

“But build­ing con­sents — a key driver of Fletcher’s busi­ness — are more than twice as high as then and show no signs of slow­ing,” he said.

Wil­son said the whole sec­tor — com­pris­ing Steel & Tube, Metro Per­for­mance Glass, Methven, Cav­a­lier — has failed to cap­ture the ben­e­fit of the build­ing boom for share­hold­ers.

Fletcher Build­ing shares closed on $4.73 yes­ter­day.

Tip Top could take the credit for launch­ing the in­ter­na­tional mod­el­ling ca­reer of Kiwi Rachel Hunter.

Source: Bloomberg. / Photo / Getty Im­ages. / Her­ald graphic

New build­ing con­sent data shows con­tin­ued strength in do­mes­tic con­struc­tion ac­tiv­ity, yet Fletcher’s share price has strug­gled.

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