Bega's bite fails to excite

Warrnambool has rejected Bega's takeover bid because it believes to be "inadequate", but the offer appears fairly compelling already.

The battle has only just begun with the spirited takeover defence put up by Warrnambool Cheese and Butter Factory Company Holdings (WCB) drawing focus to its current full year earnings.

The target’s board has outright rejected Bega Cheese’s (BGA) unsolicited advances that roughly equate to $6.14 a share for Warrnambool Cheese because the latter believes the offer is “inadequate”.

To prove its point, Warrnambool Cheese is preparing a detailed guidance for the current financial year that aims to show why the company is worth more on its own. This report will be released around the middle of next month.

Investors in Warrnambool Cheese should welcome the sabre-rattling as it could lead to an improved offer, but it doesn’t change the fact that the company is unlikely to remain an “old-maid” for very much longer.

For one, Bega’s offer looks fairly compelling as it stands with Warrnambool Cheese valued on a 2013-14 enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of 10.7 times and a price-earnings (P/E) of close to 21 times.

The first multiple (sometimes called the “takeover” multiple as it accounts for the target’s debt burden) is a 42% premium to global peers, while the P/E is at a 64% premium.

Warrnambool Cheese’s new guidance might show some further upside to its valuation, but a lot of growth is already factored into consensus estimates for the current financial year.

As it is, analysts polled on Bloomberg have pencilled in a 117% surge in underlying earnings per share to 29.5 cents for 2013-14 on the back of a 10% increase in sales to $545 million.

The other reality is that shareholders will probably get more value in the longer run from Warrnambool Cheese being part of a bigger group as food production is a volume game with pretty skinny margins.

The fact that Warrnambool Cheese has a fairly inconsistent track record in generating earnings growth or return on equity should also lend to the argument that the company is better off as part of a larger entity.

Bega, which is part of the Uncapped 100, has produced a higher quality profit over the past few years.

Shareholders in Warrnambool Cheese also shouldn’t hold their breath for a competing bid. No one is likely to contemplate doing a takeover with Bega owning close to 20% of Warrnambool Cheese.

Bega is trading 1.8% higher at $3.45 and Warrnambool Cheese is 0.2% lower at $6.09 this morning.

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