Deal or no deal: Dairy heavyweights slog it out for Warrnambool ownership
By Katy Askew | 4 November 2013
WCB proves tempting prize
The battle to acquire Warrnambool Cheese and Butter Factory has evolved into a complex series of tactical manoeuvres that could make Sun Tzu's The Art of War seem like light reading. Since the first takeover approach was announced, the tussle for WCB has seen industry majors Saputo, Murray Goulburn and Bega Cheese competing for ownership of the Australian dairy. With the stakes high, it is clear that it is all still to play for. Katy Askew reports.
Three different suitors have made competing offers to lure WBC shareholders: Canada's Saputo and domestic producers Murray Goulburn and Bega Cheese have all thrown their hat into the ring in the rush to engage in a process of consolidation in the Australian dairy sector.
Saputo currently has the highest bid. The group lifted its initial A$7-per share offer and proposed a deal valuing WCB at A$8 cash a share all in, a proposal that has received the backing of the WCB board.
WCB manufactures a variety of dairy products - including cheese, butter and cream - for the domestic Australian market and exports raw milk to Asia.
The Canadian dairy company currently has a limited foothold in Australia. But, as Saputo president and COO Kai Bockmann told just-food, WCB would offer a platform to expand further in key Asian markets. In particular, Saputo is eyeing growth in the booming dairy sectors of China, Japan and South Korea, he added.
"This opens doors for us. It is about the domestic Australian business, but it is also about Asia. The acquisition would provide us with an export platform for Asia," Bockmann commented.
However, some significant hurdles lie in Saputo's path. The company still has to gain regulatory clearance from the Foreign Investment Review Board. It also has to overcome concerns over putting control of a major Australian dairy processor in foreign hands. Put simply, farmers and staff who own an estimated 25% of WCB's shareholding need to feel secure that the market for the milk they produce and their jobs will not be put at risk by the deal and any cost cutting that may follow.
Saputo also has to navigate the fact that its competitors already hold significant WBC stakes: Bega holds 18% of shares and Murray Goulburn has 17.7% of stock. Added to the pot can be the fact that Kirin Holdings-owned Lion has taken a near 10% stake in WCB in order to protect its Australian supply arrangements. Saputo is therefore facing a combined 46% blocking stake.
If Saputo is to win through, it seems the Canadian dairy giant will likely have to offer Lion - and possibly suppliers and staff - certain assurances.
Saputo's offer is conditional on a 50% uptake and, visiting Australia last week, Saputo chief executive Lino Saputo Jnr told ABC radio that this target remained "very possible".
The second highest offer comes from the Murray Goulburn camp, which tabled a cash bid for $7.50 a share.
As Australia's largest dairy exporter, Murray Goulburn hopes to benefit from consolidation in the sector by building scale and increasing competitiveness.
For Murray Goulburn, an acquisition of WCB would also block cash-rich Saputo from strengthening its hand in Australia. According to Freshagenda analyst Joanne Bills, this motivation is given added impetus due to the highly competitive nature of securing milk supply in Australia, where demand is being driven by growing exports to Asia.
"Murray Goulburn, as with all the manufacturers here, are under enormous pressure to growth or at least maintain their supply base. There is a great deal of farmer mobility between companies in this region, and a cashed up Saputo that wants a growing supply base for its Asian ambitions would be a formidable competitor. Murray Goulburn would feel its own supply base under some threat," she suggested.
Like Saputo, Murray Goulburn still requires competition clearance. This could prove problematic: the Australian Competition and Consumer Commission has indicated that it would prefer to keep the three major milk buyers in South Australia and Victoria - Warrnambool, Fonterra and Murray Goulburn - operating on a stand-alone basis.
Indeed, three years ago Murray Goulburn was forced to drop a takeover approach for WCB when the ACCC raised concerns over milk supply. The jury is still out on whether this will happen again.
Last on the list is seeming underdog Bega Cheese, with the least attractive offer.
Bega has made a cash-and-shares bid for WCB and - while the consolidation rush has pushed Bega shares to almost unimaginable highs - the company's offer of $2 plus 1.2 Bega shares values WCB at around $7.27 at current share prices.
"The offer is a mixture of cash and shares which represents some risk for WCB shareholders. Especially those that don't have a long term view of the industry - Australian ownership etc - and just want to cash in," Bills observed.
The group's bid has been rebuffed by the WCB board - and an independent review commissioned by the takeover target - as undervaluing the company.
However, when executive chairman Barry Irvin appeared in the Australian press his weekend, he sounded a confident note and insisted the group is "strongly in the game" as it battles for control of WCB. Irvin's appearance also prompted speculation that Bega could be preparing to raise its bid for WCB.
Bega does have a number of factors working in its favour. It is the only firm to have secured regulatory clearance, with the AACC revealing last week that it will not block Bega's takeover attempt.
Bega also claims that it represents a "safe" option for WCB's farmer shareholders. "For some shareholders the headline bid price is not the only determinant here," a spokesperson told just-food last month. "Some farmers will be more interested in whether they have a home for their milk and what price they are likely to get for their milk than the price they could get for their shares. [There is] no use getting [a higher payment] for your shares if there are significant changes to your milk supply arrangements because this could significantly affect the value of your farm."
Given the challenges faced by the competition, perhaps Bega's optimism is justified and it certainly seems that Bega has the clearest run at WCB.
Last week the waters around this M&A dogfight were muddied further still when Fonterra snapped up a 6% stake in Bega for $46m.
Fonterra is currently blocked from taking a stake of more than 10% in Bega until August 2016. However, commenting on the news, the New Zealand dairy giant said it was "important" the group participates in the process of consolidation in Australian dairy.
Fonterra CEO Theo Spierings commented: "There has recently been a lot of consolidation activity in the Australian dairy industry. It is important that Fonterra participates and we have confidence in Bega and the strategy it is pursuing."
With rumours suggesting Fonterra is scrabbling to buy more Bega shares, it would seem that the world's largest dairy exporter is putting its money on Bega's ability to win through.
With very different motivations for - and very different obstacles to - these competing acquisition attempts, it is clear that there is much still to play for.
Who is likely to emerge victorious? As Commonwealth Bank of Australia analyst Jordan Rogers told just-food: "Your guess is as good as mine with how this will play out".
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Deal or no deal: Dairy heavyweights slog it out for Warrnambool ownership