In the dairy world, bigger is better, says David Williams, who is advising Bega Cheese Ltd on its attempted takeover of Warrnambool Cheese & Butter Ltd.
Williams, founder of boutique advisory firm Kidder Williams, forecasts further Asian investment in dairy exporters along the lines of a deal last year in which Mitsubishi Corp. took a 24 per cent stake in Tasmanian Dairy Products, Murray Goulburn Co-operative’s $75 million dairy processing plant.
“We’ll see more such investments in the next few years from Japanese trading houses such as Itochu and Mitsubishi and from China, which has half a dozen major dairy companies who are seeking to secure supplies of infant formula and cheese,” says Williams.
A government report last year said more than half the milk processed in Australia is by foreign companies such as New Zealand’s Fonterra Co-operative Group Ltd and Lion Nathan, a unit of Japan’s Kirin Holdings Co.
“You need scale and capital to compete in the international market and to satisfy retailers in the Australian market, such as Coles,” says Williams.
For Australia’s dairy industry, Bega’s attempt to takeover of Warrnambool is important. If successful, it would create Australia’s largest listed dairy company with production of 353,000 tonnes of dairy products a year, providing 1.6 billion litres of milk and boasting $1.5 billion in sales.
Bega is offering 1.2 of its shares and $2 cash for each Warrnambool share - equating on current prices to $6.356 a share, compared with Warrnambol’s share price of $6.29.
Williams says the offer is “full and fair” and has a good chance of success.
Bega already has an 18 per cent stake in Warrnambool and Murray Goulburn has a 17 per cent shareholding. Farmers who supply Warrnambool product own about 40 per cent of the company, with about 25 per cent held largely by individual investors.
Warrnambool farmers should not worry about a Bega win as the experience of Tatura Milk Industries' takeover shows, says Williams. Bega was able to placate farmer concern by leaving the company’s main factory and board in place. It also give Tatura farmers a more certain home for their milk, as well as paying market prices, he says.
“A lot of the cultural and historical issues pertaining to the merger will be managed and done in a respectful way as many shareholders are suppliers and Bega needs to retain milk deliveries into the factories,” says Williams.