Ambitions keep the cheese war churning

The battle for Warrnambool Cheese has become a battle of egos, with the succession of higher bids suggesting strategic issues are perhaps overshadowing questions of value and return.

“There’s a lot of testosterone around,” quipped an investment banker advising one of Warrnambool Cheese and Butter Factory Ltd’s would-be acquirers.

There has also been a deluge of transcontinental conference calls between Montreal-based Saputo Inc’s chief executive Lino Saputo Jr and his bankers at Rothschild in Melbourne and Rabobank’s New York office that has meant little sleep and mobile phones becoming an even more ubiquitous companion.

“I don’t watch the clock and I have my Blackberry with me constantly,” says one Saputo advisor.

Yesterday Rabobank and Rothschild scrambled after the close of ASX trading to check documents that detailed Saputo’s improved $8 cash offer for Warrnambool in time for the Warrnambool board to consider and endorse the Saputo bid before the ASX opened for trading today.

By 0730 AEDT this morning, the Saputo CEO and the Warrnambool board, advised by CIMB, had all agreed, much to the relief of their advisors. The takeover documents were submitted to the ASX. Lino Saputo Jr may be in Australia next week to meet his Warrnambool counterpart David Lord.

“It’s like watching a passing parade. Every day it seems there is a new bid,” says the banker advising a Warrnambool bidder.

Advisors to Saputo are hesitant to describe their $8 cash offer – as much as $8.56 once special dividends are factored in – as a knockout blow to rivals Bega Cheese Ltd and Murray Goulburn Co-operative Ltd.

One recalled that they thought their $7 cash offer would dissuade rivals, only to see Murray Goulburn offer $7.50 and Bega reiterating it was prepared to offer more, once it receives Australian Competition and Consumer Commission approval for its takeover plans.

Bega’s offer of 1.2 of its shares and $2 cash was valued at 1132 AEDT at $6.80.

“Warrnambool has become a bit of a battle of egos,” says Mark Topy, an analyst at Canaccord Genuity Australia Ltd. “It is difficult to see the commercial logic of higher bids occurring, but this does not preclude the possibility that strategic issues are now overshadowing consideration of value and return.”

Certainly, the stock market perceives Saputo will be challenged again. At 1132 AEDT Warrnambool shares were trading at $8.42, a 5.3 per cent premium over Saputo’s $8 a share offer.

Saputo has deep pockets as its $C10 billion ($A10 billion) market value attests. The National Bank of Canada and Bank of Montreal are prepared to finance an even higher bid by their client.

But at $8 a share, Saputo’s bid values Warrnambool at 10.3 times forecast 2014 earnings before interest, tax, depreciation and amortization of $51.1 million. That’s a considerable premium above the median value of publicly listed international dairy companies, who trade at 7.5 times.

Saputo is not prepared to increase its takeover offer repeatedly. But it does perceive its rivals have less firepower than them to further improve their bids: it believes Murray Goulburn and Bega’s bankers aren’t prepared to finance higher offers for Warrnambool because the respective companies debt loads would become too onerous.

Murray Goulburn and its bankers at Lazard Ltd reject such talk. ANZ Ltd., National Australia Bank Ltd and Westpac Banking Corp are prepared to lend more while the cooperative may issue securities to help fund an improved offer.

Bega is also unwilling to wave the white flag.

Its banker, David Williams, says the company’s offer is the only one shareholders can accept as Bega has posted its takeover offer to Warrnambool shareholders.

“Ours is the only bid in shareholders hands that can be accepted,” says Williams.

And what does Williams think of Saputo’s latest offer?

“It’s all good sport,” he tells DataRoom.

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