There are domestic and overseas factors behind Australian dairy firm Bega Cheese’s bid for local peer Warrnambool Cheese and Butter Factory.
Competition among processors for milk supply in Australia, price pressure from retailers and the need for greater scale to compete internationally are the key reasons for Bega’s move for WCB.
It is a move analysts had long suspected could happen. Bega is a shareholder in WCB – it first invested in the company in 2010 – and industry watchers have long suspected the business could look to up its holding in the company.
Bega has made a cash-and-share offer valuing WCB at A$319m (US$224.4m). It said the offer equated to a 30% premium to the volume average weighted price of WCB shares over the past month.
WCB, which fought off takeover interest from Australian dairy co-op Murray Goulburn three years ago, is reviewing the Bega bid and last week urged investors to not take any action until its board gives its verdict.
Tellingly, however, WCB has already labelled the offer “opportunistic” and has made a point of highlighting to its investors the company’s recent moves to try to boost growth and profitability.
In a letter to shareholders last week, WCB chairman Terry Richardson said the company’s recent initiatives, he said, “are contributing to an improving product mix, higher margins and earnings diversification” and “will create significant value for shareholders”. In the last year, for example, WCB has signed deals to produce cheese products for Kraft Foods and, notably, made a move to expand its own business in Asia with an agreement to supply milk powder to Japan’s Mitsubishi Corp. WCB has seen its profits fall in its last two financial years and hopes such moves will improve results.
However, Bega executive chairman Barry Irvin has said the “benefits” of his company’s bid “for each company’s shareholders, many of whom are farmer-supplier shareholders, are highly attractive”.
He pointed, for example, to the financial benefit of annual synergies of A$7.5m and the prospect of owning shares in Bega. However, Irvin also outlined what a larger entity could mean strategically. “Customers, dairy farmer suppliers and employees will also benefit from being associated with a larger, more diversified organisation, an enhanced market position and a scale that is globally relevant.”
Industry watchers in Australia believe there are a number of reasons that are driving Bega’s move for WCB. Joanne Bills, director of Australian agribusiness consultants Freshagenda, says “this type of consolidation is overdue” and adds: “There has been intense price-based competition for supply, with a number of companies looking to secure increased supplies from a flat or declining supply base. There are manufacturing synergies to be gained – there are too many under-sized plants, with none of the companies having the capacity to make significant investments in infrastructure. And, finally, the need to have some scale to have a greater relevance for international markets. This is a significant issue for Australia’s dairy companies, given the size of our competitors and customers in international markets.”
Bills says WCB can offer Bega a “significant” supply base in western Victoria, which she says is the largest milk supply region in Australia. “Bega’s milk intake is currently around 695 million litres, WCB supply is 890 million litres. Bega has limited supply from this region currently, with its supply concentrated in the Bega Valley -which has limited growth prospects and Northern Victoria – which is consolidating and now growing. The WCB acquisition offers greater geographic diversity in terms of milk supply,” she tells just-food.
Securing a broader supply of milk will, of course, help Bega domestically and better serve international markets. Bega saw its annual sales and profits rise in the year to the end of June but, in the company’s report on its results, Irvin still noted how “highly competitive” trading conditions had been in Australia. Retail pressure has been more keenly felt on Australia’s milk supplier rather than cheese firms but a stronger supply base will do Bega no harm should it need to look at margins.
From Bega, meanwhile, the international rationale for both companies is clear: both need the deal to better compete on the global stage. Bills says more than doubling its supplier base will give Bega the opportunity to pursue growth. “It is important to have the scale and flexibility to service large overseas customers, and the expanded business will offer Bega greater scope to be relevant to current and potential customers,” she says.
Dairies around the world are eyeing booming demand for dairy products in emerging markets, particularly regions like Asia. It has been a factor that has underpinned other deals in the global dairy sector in recent years – from the merger of Dutch dairy firms Friesland Foods and Campina in 2008 to the announcement in June that French co-op Sodiaal plans to merge with local peer 3A.
A combined Bega and WCB would be better placed to try to compete with its international peers and meet that demand. “The combined entity would have greater access to capital. We expect soaring Asian dairy demand to continue and dairy companies in Australia will need to invest heavily in infrastructure,” Jordan Rogers, an analyst at Commonwealth Bank of Australia, says.
Asia is seen as a region vital for the growth of Australia’s food industry, with companies across the sector looking to invest to grab a piece of strong demand on its doorstep.
But what are the intentions of another investor on the WCB share roster – Murray Goulburn? It owns a 17% stake in WCB and tried to buy WCB in 2010 but withdrew its bid after rebuttals from the WCB board and indications Australia’s competition watchdog thought a deal could hinder competition in parts of the milk market.
As an unlisted co-op, Murray Goulburn has no shares to offer in any counter offer. Any bid for Murray Goulburn would still likely interest anti-trust officials in Australia. But could it make a Bega takeover more difficult?
Rogers believes it is unlikely Murray Goulburn would table a counter offer – but is by no means certain to accept the Bega bid. “Murray Goulburn bid $4.35 a share for WCB and has shown a reluctance to pay more than $4.65 a share. Bega’s bid for WCB values the company at more than $6 a share. While Murray Goulburn could launch a takeover bid, we view this as unlikely,” he tells just-food. However, he adds: “We are unsure whether Murray Goulburn will accept Bega’s offer, in which case, WCB is likely to stay listed on the Australian stock exchange.”
Bills also suggests an offer from Murray Goulburn is unlikely. “Murray Goulburn has continued to up its stake in WCB in recent months, but the current Murray Goulburn MD Gary Helou has stated that while he would like WCB’s supply base, the plant is of limited interest to him,” she says. “Murray Goulburn already has its largest plant in the western Victorian region, and both plants are near capacity, as it stands the plant offers little incremental benefit for Murray Goulburn. That view, combined with the fact that Murray Goulburn has already committed to a A$120m investment in plants over the next 12 months begs the question about how fully priced a counter offer from Murray Goulburn would be.”
The next move, then, looks likely to be from the WCB board.