Warren Buffett has been selling ETFs. Photo / File
Materials issued by Fonterra this week suggest the co-op is keeping an open mind to an initial public offer (IPO) for its consumer businesses, but analysts say a trade sale looks to be the most likely option.
Meanwhile, roadshow documents put the 2024 earnings before interest and tax for the “in scope” assets for sale at $200 million – compared with $282m in materials released at last September’s financial result.
The pack included a more refined view of the components of the Mainland Group business compared to previous financial disclosures, such as a decision to retain a manufacturing facility in Saudi Arabia and its Greater China consumer business.
The co-op is exploring potential divestment options for its global Consumer business, as well as Fonterra Oceania and Fonterra Sri Lanka.
In notes included in the materials, Fonterra said the difference was mostly due to what was included in the “in scope” businesses being put up for sale, and proposed contractual arrangements post-separation from Fonterra.
As a result, the implied capital in the businesses is probably $2.7 billion versus the $3.4b previously signalled, Forsyth Barr senior analyst Matt Montgomerie said, adding it would lower the possible proceeds in terms of capital that could be received from a sale.
“An IPO would be great for the New Zealand market – it’s clearly been a long time since we have seen an IPO of this size.
“That being said, our view is that a trade sale would probably realise proceeds that are likely to be higher than from an IPO, mostly because of the synergy value that could be delivered from a trade sale.
“If you compare return on capital and the margins of Mainland Group versus other fast-moving consumer goods (FMCG) listed businesses, then they are significantly higher, which emphasises why Fonterra wants to get out.
“But also, inherently, that could be inferred positively from a potential buyer’s point of view as an opportunity to realise value that Fonterra has not been able to achieve.”
The documents put Mainland’s group ebit (earnings before interest and tax) margin at just 4%, which Montgomerie said reinforced Fonterra’s decision to exit.
“It’s probably still some time before we get some detail, but we could still envisage a world where there is more than one transaction if there is a trade sale, given the number of different businesses up for sale.”
Fonterra would certainly be hoping for “well over” $2b in proceeds from the sale.
“If you apply similar multiples to Fonterra’s Soprole sale in late 2022 you get a range of $2.3-$2.6b.
“If you were to be more cynical and look at implied multiples for [Synlait Milk’s] Dairyworks, you can arrive at values in the low to mid $1b range,” he said.
If it came to a trade sale, Australia’s Bega Group has been touted as a possible contender as it already has commercial arrangements with Fonterra.
Fonterra’s roadshow coincided with a big earnings upgrade for the dairy giant – the co-op now expects earnings per share of 55-75c from a previous forecast of 40-60c.
Jarden, who with JP Morgan and Craigs Investment Partners is advising Fonterra on the sale process, said good fortune “keeps running” for Fonterra’s ingredients.
“While more detail will come with first half 2025 results [due March 20], the conditions have continued to be good for profitability in Fonterra’s key ingredients business likely driving the upgrade,” Jarden said.
Jarden has increased its full-year earnings per share estimate for Fonterra to 64c, with 2026 and 2027 estimates largely unchanged (reverting to just under 55c).
The broker noted the scope of businesses being put up for sale had been slightly reduced, which would mean more earnings would stay with the co-op post any sale.
The broker upgraded its 12-month target price from $4.57 to $5.19, with an “overweight” recommendation.
“Over the last five years, Fonterra has sustained a significant turnaround with the business much more clearly focused on its core operations, evident in its plans to divest Mainland.
“While we still retain some uncertainty on the translation of an increased capital investment outlook into earnings, our confidence in base earnings on a more focused and well-capitalised co-operative are stronger following the changes that have been made to date,” Jarden said.
Underwriters of Ryman’s capital raise are now the proud owners of 53 million shares (worth $161m) in the retirement village company after the retail part of its capital raise failed to garner full support.
The offer was underwritten by Craigs, Forsyth Barr and Jarden.
Ryman had already raised $721m from a share placement and institutional entitlement offer, and aimed to get an extra $280m from the retail offer.
The company said the retail leg was “well-supported in the current market climate” – the effective take-up rate being 42%.
The shares not taken up had been allocated to the underwriters and/or to sub-underwriters procured by the underwriters, including a range of existing institutional shareholders.
“This capital raising will enhance Ryman’s financial stability and resilience in the current market climate and provide the platform required to achieve an improved level of performance and return to growth as market conditions recover,” Ryman said.
US investment guru Warren Buffett has said in the past that one of the best ways for investors to own stocks is through an index fund that charges minimal fees, research firm Morningstar noted.
So many were surprised to find that Buffett’s Berkshire Hathaway sold its entire positions in two market tracking ETFs last quarter: SPDR S&P 500 ETF SPY and Vanguard S&P 500 ETF VOO.
Morningstar analyst Susan Dziubinski noted that neither Buffett nor his colleagues have commented publicly on the sales, but that hasn’t stopped the financial media from speculating.
“Some suggest that Buffett is sceptical about overall market valuations,” Dziubinski said in a research note.
“Others think the sales are simply another example of Berkshire adding to its record-breaking cash reserve, which topped US$321b ($559m) at the end of 2024.”
So, what should investors who own one of these two ETFs make of the sales?
From Morningstar’s perspective, not much.
“SPY and VOO are two of the biggest ETFs for a reason: They provide investors with a low-cost way to get exposure to US large-cap stocks – and as a result, these ETFs are valuable anchors in investor portfolios.
“Plus, Berkshire’s sales aren’t a reflection of any fundamental changes at these ETFs,” Dziubinski says.
Both ETFs earn high ratings from Morningstar, though VOO does earn a higher rating than SPY thanks in part to its lower fees.
“Yet investors can use Berkshire’s sale as a reminder to check in on their own portfolio allocations.
“Is your portfolio overly exposed to US large company stocks? Could you benefit from adding some diversification though a total market ETF that includes smaller companies than the S&P 500 does?
“Or maybe you should consider adding an ETF that invests in international stocks to your portfolio for some additional diversification,” Dziubinski said.
“In the end, Berkshire’s move provides us all with food for thought for our own portfolios, not a sell signal,” she said.
OPINION: The cost of doubling down.