Bega Cheese in tilt for Warrnambool

Warrnambool Cheese and Butter Factory is to meet on Friday to discuss a takeover offer from its largest shareholder, Bega Cheese, that would create the country's biggest listed dairy company.

News of Bega's bid - $2 cash plus 1.2 Bega shares for every Warrnambool share - pushed shares in the dairy groups to record highs.

But Warrnambool shareholders hoping for a bidding war might be disappointed. Its second-biggest shareholder and one-time suitor, Murray Goulburn Co-Operative, might not have the financial muscle to match Bega's bid, analysts say.

Bega's offer needs also approval by the Australian Competition and Consumer Commission, which has confirmed it would conduct a review.

Bega Cheese, which holds an 18 per cent stake in Warrnambool, said a takeover bid was the "next logical progression to create a strong, Australian owned, ASX-listed dairy company with history and shared values that stretch back over 100 years".

Warrnambool told shareholders to take no action while it considers the offer. Murray Goulburn Co-Operative, which has a 16 per cent stake in Warrnambool, said it would also take time to consider the bid. Murray Goulburn is owned by farmers, and, Ord Minnett analyst Stephen Scott said, it would be "forced to make a decision at a time when it is undergoing rationalisation, new product initiations are under way and a large capex program is on foot".

Belinda Moore, an analyst with RBS Morgans, said the bid value of $5.78 - a 28 per cent premium on Warrnambool's pre-bid closing price - was a "good price" for shareholders.

She said while previous dairy transactions have had higher multiples, these were for "large diversified companies with strong retail brands" and the share component of the bid offered upside in the merged company.

Warrnambool Cheese and Butter is Australia's oldest dairy processor, and according to Ms Moore, operates the "largest and most efficient dairy processing site in Australia", with an attractive large presence in the export market.

It has rallied since a farmer revolt several years ago, which pulled it into the red by almost $20 million. Warrnambool recently reported flat revenue of $495.8 million, and halving of profit to $7.49 million over the year to June.

Bega, a former farmer-owned co-operative which listed on the sharemarket two years ago, reported a 24.6 per cent rise in annual profit to $25.4 million. Revenue grew by 8.3 per cent to $1 billion for the 2013 financial year.

Executive chairman Barry Irvin said a combined company would generate revenue of $1.5 billion, operate more than seven sites, and employ about 2000 people in regional Australia. Bega is also promoting $7.5 million in annual savings.

Shares in Warrnambool closed 28 per cent higher on Thursday to $5.77. Bega share were up 5.7 per cent to $3.33.