NZ's Fonterra launches sale of $430 million dairy fund

WELLINGTON (Reuters) - New Zealand's Fonterra, the world's largest dairy processor, launched the sale of a NZ$525 million ($430 million) fund offering investors exposure to the country's dairy industry, part of a scheme to free up cash as its expands into Asia.

Fonterra, which aims to compete with food giants Nestle (NESN.VX) and Danone (DANO.PA), expects Asian demand for dairy products to far outstrip supply by 2020 and is setting up farms and dairies in China and building factories in Indonesia.

The new fund is part of wider plan to relieve pressure on Fonterra's balance sheet from its structure as a co-operative, and ensures ownership of the industry remains with farmers.

Analysts said the company's 21 percent share of global dairy exports, along with its exposure to the agricultural economy and Asian growth would be attractive to investors.

"It's clearly a very interesting issue," said Guy Elliffe of AMP Capital Investors. "We'll be taking a close look at it."

Fonterra said it expected the fund's units, to be based on its dividend stream, would be priced at NZ$4.60 to NZ$5.50 each, for a gross yield of 5.8-7.0 percent based on next year's forecast 32 cents a share dividend.

The final price of the units will be set on November 27 after a book build with institutions, after which trading will start on the New Zealand and Australian stock exchanges.

Returns are based on Fonterra's dividends, which reflect global dairy prices and its consumer business, but the shares do not give investors any voting rights in the co-op.

SOLID DEMAND

Fonterra Chief Executive Theo Spierings said there was solid institutional demand for the units.

But current shareholders, retired farmers and other domestic retail investors, who have buying priority, are also eager to snap up the offer, which may leave a only limited chunk available for outside investors.

Fonterra is owned by about 10,500 farmers, and controls around 90 percent of New Zealand's milk production, generating more than 7 percent of the country's gross domestic product.

Fonterra's initial foray into China through a stake in Chinese dairy company Sanlu collapsed in the wake of the melamine-tainted milk scandal, in which at least six children died in 2008.

It now wants to control the production process and currently produces a modest 55 million liters of milk in China through its own farms. Fonterra said earlier this year it would spend around NZ$100 million to develop two new large scale dairy farms as part of its plan for an integrated milk business.

Global dairy prices hit a 2-1/2-year low hit in May, but have been recovering and are expected to improve as global dairy demand picks up, underpinning Fonterra's earnings.

As well as the fund, Fonterra launched a scheme where its farmer-owners can trade shares amongst themselves. This will free the co-operative from its obligation to redeem and issue shares when farmers leave or join the co-operative, or when milk production fluctuates.

In the 2007/2008 season, the co-op's balance sheet took a NZ$600 million hit after drought sharply reduced production, leading to a mass redemption of shares.

(Reporting by Naomi Tajitsu; Editing by Richard Pullin)