Bega to beggar

Bega Cheese (BGA) will be under some pressure today after Warrnambool Cheese and Butter Factory Company (WCB) announced that it is throwing its weight behind a competing bid that values the target company at $392.7 million.

Warrnambool Cheese signed a bid implementation deed with Canadian-listed Saputo as it believes the rival offer is superior to the one proposed by Bega.

Saputo is willing to pay $7 a share for Warrnambool Cheese, which could be worth as much as $7.56 to Warrnambool Cheese shareholders if franking credits are included.

The release of franking credits is dependent on the level of support Saputo gets from the target’s shareholders and both parties are liable to pay a break fee of $3.9 million.

Warrnambool Cheese’s board had rejected Bega’s approach as it felt it had too many conditions attached and did not reflect the real value of Warrnambool Cheese.

Bega is offering of $2 a share and 1.2 Bega shares, which gives a theoretical bid price of about $6.30 a share at yesterday’s close.

Bega could offer more, but it won’t be an easy deal to digest as Bega will likely have to take on a fair amount of debt if it wanted to improve the offer.

Bega has a market cap of $544 million, $87 million in net debt and around $24 million in cash at hand. On the other hand, Saputo has a market cap of $9.64 billion.

Warrnambool Cheese looks like it will be able to consummate the deal with Saputo even without the support of Bega, which holds around 18% of Warrnambool Cheese.

Saputo’s offer condition only requires 50.1% of Warrnambool Cheese shareholders to accept the deal, although under that condition, shareholders will only get 20 cents a share franking credit.

To get the full 56 cents in tax credit, 90% of shareholders will have to accept Saputo’s bid.

Bega, which is part of the Uncapped 100, closed at $3.58 on Monday; while Warrnambool Cheese finished at $6.46.