Dairy Equity float down $7.8m as wary investors scale back

The scheme could appeal to individual farmers wanting to expand business or looking to cash in and retire. Picture / Andrew Warner

Wary investors have been allowed to scale down their involvement in the Dairy Equity offer following media coverage containing "mixed messages" about the company's Fonterra equity swap scheme.

It means the $100 million float will be taking in $7.8 million less than expected.

Part of the rationale for allowing the scaling-down is to help avoid a sell-off when Dairy Equity lists on the NZX tomorrow.

Last month, the float's lead manager, ABN AMRO Craigs, said $80 million worth of shares had been firmly allocated to brokers and institutions before the offer opened.

Allocations of another $20 million worth of oversubscriptions were expected to be significantly scaled back because of strong demand.

But since the float opened, a number of farmers have expressed scepticism about the merits of the scheme, which would have them swapping beneficial interests in their Fonterra shares - including price gains and value-added returns - for cash.

Some have felt they might be better borrowing from the bank, although Dairy Equity believed its product would still appeal to a wide range of farmers.

The managing director of Dairy Equity's management company Geoff Taylor said yesterday the "mixed" media coverage had made some investors wary of honouring all their oversubscription commitments and they wanted to pull back.

"We've agreed to that. It's better to have people involved that are, without qualification, comfortable."

Taylor - a former Fonterra corporate finance manager - said allowing people to scale down their commitment helped avoid them selling off stock after Dairy Equity lists tomorrow.

"That can be the problem of insisting that people take up their commitments when they aren't comfortable."

Dairy Equity said a total of $92.2 million had been subscribed, being the original $80 million allocation plus $12.2 million of oversubscriptions.

ABN AMRO Craigs executive chairman Neil Craig said that - while the sum was less than earlier expected - raising $92.2 million for a "cash box" was an "outstanding achievement and an endorsement of the public's interest in Fonterra shares".

The initial share register had a mix of private individuals and institutions, with fund manager AllianceBernstein holding a 12 per cent cornerstone stake.

Craig said that the level of farmer inquiry about the scheme had been in line with pre-offer expectations.

Now that the offer had closed, Dairy Equity was able to formally start arranging agreements with farmers.

Craig said the scheme could appeal to corporate farmers with a lot of capital tied up in Fonterra, or to individual farmers wanting to expand their business or free up capital for purposes such as retirement.

Dairy Equity had said it believed this week's Fonterra shareholders' council criticism of the co-op's payout performance would increase farmer demand for equity swaps.

Chairman Peter Jensen also said the scheme was designed to accommodate changes in Fonterra's capital structure and payout system.

"We believe that it is is highly unlikely that Fonterra will make payout or other changes that destroy shareholder value."