Bega to win cheese

The words may appear harsh, the sentiment obviously negative. But there is every reason to believe Bega Cheese (BGA) will emerge the victor in its quest for control of Warrnambool Cheese and Butter Factory (WCB) despite this morning's knock-back.

Although fiercely independent, Warrnambool directors would be mindful of the need and the inevitability of dairy industry rationalisation.

Their rejection this morning of Bega's $320 million share and cash offer is a mere formality, a well anticipated ploy to extract a higher offer.

The market expects it, Warrnambool shareholders demand it and Uncapped 100 stock Bega no doubt has factored that into its strategy.

Despite the generous 30% premium, Warrnambool shares have traded above the $5.75 offer from the day it was launched last week, opening this morning at around $6.

The companies have a had a close relationship for several years. Warrnambool has only recently emerged from a period of financial difficulties and Bega's 18% shareholding was bought as a means of support.

While Murray Goulburn Co-Operative also has a substantial stake, Bega was invited on to the register to ward off a perceived threat from the regional rival.

The Co-Op recently signed a lucrative deal with Coles along with a supply agreement into the Chinese market but its  ability to launch a rival offer for Warrnambool would be hamstrung by its capital expenditure commitments. It would also view the cash on offer from Bega as attractive.

Bega's offer would appear to be close to fully priced. But the recent drop in the Australian dollar and Fonterra's recent travails have boosted dairy industry prospects, and will be used as justification to tweak the bid.

Unless a foreign rival emerges, Warrnambool can't really afford to reject a sweetened offer outright. Its dairy producer shareholders have been struggling and could do with the cash. Plus the scrip component deals them into any recovery in the industry.