Bega is surprise frontrunner in Warrnambool race

The competition watchdog has cleared Bega’s bid for Warrnambool Cheese and Butter, putting it more than a step ahead of rival suitors Saputo and Murray Goulburn.

Can the guys who have been all but dismissed by rivals in the takeover battle for Warrnambool Cheese and Butter Factory Ltd. be in prime position to snatch the Victorian dairy company? Maybe so.

After clearance from the Australian Competition and Consumer Commission, Bega Cheese Ltd’s Warrnambool takeover offer is worth $7.31 a share as of 1251 AEDT. Bega argues that if its offer goes unconditional its bid is the only one Warrnambool shareholders can accept and get paid for.

Murray Goulburn Co-operative Ltd’s $7.50 a share offer may trump Bega’s, but the dairy cooperative is yet to lodge an application with the Australian Competition Tribunal, or a bidders statement. In 2010 the ACCC said of Murray Goulburn’s bid for Warrnambool: “The proposed acquisition will likely to have the effect of substantially lessening competition in the markets for the acquisition of raw milk from farmers in the south west region of Victoria and the central and south east regions of South Australia.”  That doesn’t bode well for Murray Goulburn’s Competition Tribunal hearings.

Saputo Inc’s $8 a share offer is superior to Bega and Murray Goulburn’s bids but the Canadian company’s requires approval from the Foreign Investment Review Board, while Bega, Murray Goulburn and Lion - a unit of Kirin Holdings Ltd. - have an effective combined blocking stake of 46 per cent on Saputo’s 50.1 per cent conditional offer.

If Bega may decide to go unconditional with its bid soon instead of waiting to see if the Saputo and Murray Goulburn bids are cleared by regulators.

The problem for Bega’s chairman Barry Irvin is that Warrnambool’s chief executive David Lord and his board have snubbed his offer, saying it undervalues the company. But now Bega’s share price is within the fair-value range, as assessed by KPMG, of $6.96 to $7.49. Bega may not need to increase its offer for Warrnambool if it is the only bidder left for Warrnambool.  

That prospect terrifies Saputo, its bankers Rabobank and Rothschild, Murray Goulburn, advised by Lazard Ltd, and Warrnambool, whose bankers are CIMB. CIMB is likely to get a fee no matter what happens to Warrnambool, but the prospect of a hefty payday for Saputo and Murray Goulburn’s advisors may be receding.

Bega’s Irvin and his advisor, David Williams of Kidder Williams Ltd, will have to play nice with Lion, which paid about $50 million for a 9.99 per cent stake in Warrnambool on Tuesday that it bought on the stock market through brokers RBS Morgans.

Lion is potentially the kingmaker in any Warrnambool takeover battle and Irvin and Williams may be spending a lot of time on the phone to Lion and Greenhill & Co, the bankers to the company. The pair may also try and use their charm to convince Murray Goulburn managing director Gary Helou and his advisor, Lazard’s John Wylie, not to stand in the way of their proposed Bega acquisition.

It may help that Williams and Wylie mix in the same Melbourne social circles. Still, Bega's offer is 16 per cent below Warrnambool's stock price of $8.45 and Irvin and Williams may have no choice but to boost their bid.