Murray Goulburn has seen milk intake fall by almost 25% in two years

Murray Goulburn has seen milk intake fall by almost 25% in two years

It is four years this month that Murray Goulburn, Australia's largest domestically-owned dairy business, was vying to buy local peer Warrnambool Cheese and Butter Factory.

Murray Goulburn ended up being beaten to the punch by Canada-based dairy giant Saputo - and, this week, it has ended up selling itself to the same company.

It has been a problematic 18 months for Murray Goulburn, a business that once had designs on being at the forefront of capturing the growing dairy and infant-formula consumption in Asia.

However, that Murray Goulburn's fortunes had turned sour became clear in April 2016 on the tumultuous day the company, pointing to weak dairy commodity prices, issued a profit warning, cut the price it pays farmers for milk and announced the departure of its MD and CFO.

The co-op then had eight months without a permanent CEO until former SABMiller executive Ari Mervis was appointed last December and it was he who, this June, launched a "comprehensive" review the business said will look at "all aspects" of its strategy and corporate structure.

In the financial year to the end of June, the Devondale milk owner booked a net loss after tax of AUD370.8m and a 10% fall in revenues. Murray Goulburn reduced its net debt after cash by AUD35m but the pile still stood at AUD445m. The co-op's gearing level at the end of the financial year was 37.7%, up from 29% a year earlier, as a result of what it called "material impairments" due to its review of its business and footprint.

Critically, the volume of milk Murray Goulburn received fell by more than a fifth year-on-year as farmers, put off by the co-op's prices, moved supply. It is estimated Murray Goulburn has lost around a quarter of its supply in the last two years - with Saputo as one of the beneficiaries. Add to the drop in milk intake the pressure from debts and it is little wonder Murray Goulburn, by launching the review, effectively put the business up for sale.

It was alongside those annual results the embattled co-op revealed it attracted interest from unnamed parties considering buying part or all of the company. At the end of August, it then emerged Murray Goulburn had offloaded one local brand but the rump of the business remained up for grabs. 

Saputo has apparently beaten the likes of Australian dairy group Bega Cheese and Chinese giant Yili to strike a deal with Murray Goulburn. The transaction still needs to be approved by competition officials - which may not be a foregone conclusion. The transaction is to see Murray Goulburn and Warrnambool Cheese and Butter Factory become stablemates. Murray Goulburn's 2013 tilt at Warrnambool Cheese and Butter Factory was not the first time it tried to buy the business; in 2010, Murray Goulburn withdrew a bid for the business amid indications Australia's regulators were concerned about the impact a deal between the two firms could have on local competition.

However, a wise Saputo would have weighed up these issues before making its move for Murray Goulburn and it will have its eyes on the future. The company will be believing it can, for all Murray Goulburn's recent woes, use the asset to further improve its prospects in Asia.

Michael Van Aelst, an analyst covering Saputo for Canadian investment bank TD Securities, said the AUD1.31bn purchase price was "higher than what was speculated" but added: "Arguably, it is not unreasonable considering the potential upside of MG assets in the hands of Saputo management.

"MG is a strategic acquisition for Saputo, adding sizeable scale, strong domestic brands, and a robust Asia export presence to Saputo's already attractive Australian operations. The combined company would be the undisputed leader in the Australian dairy processing sector, taking in an estimated 35% of the country's milk supply. Over time, MG should accelerate Saputo's organic growth as it works to recover lost volumes and adds much greater exposure to the faster-growing Asian dairy markets."

Despite the recent decline in Murray Goulburn's milk supply, the co-op's domestic operations look set to give Saputo a larger platform to target rising demand in markets like China. Beijing continue to support the growth of its domestic dairy and infant-formula sectors and the rise of some homegrown heavyweights, combined with recent changes in regulations, has made trading conditions tougher for multinationals operating in the country. However, Chinese interest in foreign dairy and infant-formula products remains strong and Australian companies have been at or near the front of the queue in capturing that demand. As Australia's largest dairy processor, even after a troubled two years, Murray Goulburn gives Saputo a solid chance of building a business in countries like China as it faces stagnant core dairy markets in Canada and the US.

And, even though Murray Goulburn ultimately failed to fulfill its own Asian ambitions, but the business also provides Saputo, three years since prevailing in the battle with Warrnambool Cheese and Butter Factory, with a presence in Asia.

In July, Murray Goulburn, searching for savings, announced the closure of offices in Singapore and further afield in Dubai but it retained a base in China to where it exports liquid milk, adult milk powder and infant formula. The co-op works with local distributors to sell its products in other markets in south-east Asia. Murray Goulburn also has a business-to-business division supplying ingredients to customers in China, Indonesia, Thailand, Malaysia and Bangladesh.

In Saputo's 2017 annual report, which covered the 12 months to 31 March this year, it reported how it had a "strong year" in Australia, growing its milk intake and benefiting from its 2015 acquisition of cheese assets from local food and drinks group Lion. Saputo's sales by revenue and volume in Australia rose year-on-year.

There is, of course, also the prospect of realising synergies from having Warrnambool and Murray Goulburn under the same owner.

There has been, perhaps understandably, plenty of rancour in Australia about the sale of another domestic asset to overseas owners. However, the real anger was heard within the ranks of Murray Goulburn farmer-members. The proposed deal with Saputo includes higher payments for Murray Goulburn's farmers but the transaction was announced a couple of hours before the co-op's annual shareholders meeting, at which one member then reportedly accused the business of "capitulating".

However, from Saputo's perspective, despite the price it has paid, despite the recent problems at Murray Goulburn and despite the challenges the Canadian company will face in improving the new asset's performance, especially in the face of stiff competition, the deal, industry watchers agree, gives the Quebec-based group a chance of carving out a robust foothold in one of the world's most attractive dairy markets.