Bernard Hickey: Fonterra floats Claytons share proposal

Investors over the age of about 35 may remember a non-alcoholic whiskey called Claytons, marketed in the 1970s and 1980s as "the drink you're having when you're not having a drink".

"Claytons" has sunk into the Kiwi vernacular as something pretending to be something else, in a harmless sort of way.

Last week, Fonterra announced it was proposing to launch a Fonterra Shareholders Fund to go with its plans for farmers to trade Fonterra shares between each other.

The initial response was somewhat confused. Is this a way for outside investors to buy Fonterra shares? Will this be a backdoor stockmarket listing? Will farmers retain their ownership of Fonterra?

The best way to describe it is a "Claytons Fonterra share". Fonterra says it will allow farmers the flexibility to raise cash from their Fonterra shares without having to give up control of the co-operative.

The global financial crisis has sharpened the need for Fonterra to raise fresh capital. It also still needs an escape valve that allows farmers to leave the industry or cope with a drought which doesn't suck Fonterra's cash coffers dry.

So Fonterra needed a pool of funds that farmers can use to trade shares as they exit and enter the industry.

The Fonterra Shareholder's Fund is the solution. It will buy the rights to dividends and any gain (or fall) in the underlying value of Fonterra shares, but will not control the voting rights in the actual shares.

This seems a perfect solution. Farmers get access to cash without losing control.

Demand for protein from China and India will grow strongly in the coming decade. New Zealand's ability to reliably and safely produce these milk products puts Fonterra in the box seat.

But whether this Claytons Fonterra share proves as satisfying for investors as for farmers is debatable. It could be attractive if the dividend is high enough and Fonterra's shares keep rising.

The fund will also need to be big enough (at least $500 million) to create a really liquid market.

* Bernard Hickey, managing editor, interest.co.nz.

bernard.hickey@interest.co.nz