Bega bunkers down

It may be outgunned on price but Bega Cheese (BGA) reckons it still is in the box seat to grab Warrnambool Cheese and Butter (WCB).

Canadian group Saputo has slapped $7 a share in cash on the table in a move that has won the approval of the Warrnambool board and that easily trumps Bega’s cash and scrip combo valued at around $6.30.

The Canadians have also promised to distribute franking credits if they reach 50.1% ownership, worth between 20c and 56c a share.

Bega has begun a campaign to win over the hearts and minds of its target arguing the industry needs to be rationalised rather than more fragmentation and that a combined Bega Warrnambool would be a better deal for farmers and shareholders in the longer term.

Bega, which is part of the Uncapped 100, already owns 18% of Warrnambool while Murray Goulburn Co-op – for years a potential suitor to Warrnambool – holds around 17%.

That combined holding could make it difficult for the Canadians to reach their stated minimum 50.1% acceptance target. But with cash strapped farmers faced with a stark choice of a vastly superior and certain cash offer or the possibility of better times ahead, the cash is likely to win out.

Oddly, rather than open the process up to competition, Warrnambool has agreed to an exclusivity agreement with Saputo with a beak fee for both groups.

It rejected Bega’s opening bid on the grounds that it undervalued the company, arguing the synergies were greater than Bega’s estimated $7 million, an argument that tends to support Bega’s proposition that longer term, shareholders would be better off with Bega.

Bega argues that its offer remains superior because Warrnambool shareholders will receive their cash and shares immediately rather than being forced to wait until 50.1% acceptances are reached for Saputo.

Unfortunately for Bega, it does not have the financial muscle to match the Canadian offer. But it is showing no sign of capitulation. Nor is it countenancing any thoughts of taking the Canadian cash.