Bidder make it Bega?

Any suitor that throws in a bid for the cheese maker may bite off more than they can chew.

The breathtaking surge in Bega’s share price must leave its investors wondering what comes next?

This year alone has seen Bega’s share price climb a mammoth 140 per cent. The majority of the gains were reached before Saputo’s initial bid for Warrnambool Cheese and Butter, which accounted for around 9 per cent of Bega’s market capitalisation at the time.

Bega is not for sale, according to Kidder Williams Ltd, the investment bank advising Bega. A potential buyer could have something to say about this, sending Bega from suitor to prey. But it does look unlikely looking at existing players.

The details of Bega’s constitution make it difficult for any potential suitor to build a strategic position in the company – maximum ownership is currently capped at 10 per cent of the register. The only way around this for a potential suitor is an off-market bid.

Any bid from local rivals such as Murray Goulburn would need to make it past watchdog the Australian Competition and Consumer Commission. It is also probable a foreign acquirer of Bega would struggle if Canada's Saputo is in fact successful in acquiring Warrnambool Cheese and Butter. Given speculation Joe Hockey may quash or restrict Archer Daniel Midland’s offer for GrainCorp, it doesn’t seem permissible for another Australian pastoral asset to find its way into foreign hands. 

There is often a significant share-price gain of target’s in acquisitions, so much so there are hedge funds specialising in seeking out takeover targets. Similarly, investors can do the same due diligence to benefit, which could in part explain some of Bega’s share-price rally independent of Warrnambool’s heft gains.

A rally in Bega’s share price is not undeserved. Bega’s full-year results beat estimates – the market reacted by pushing Bega 5.8 per cent higher. Looking at the future there are a few factors which in fact support future earnings for Bega – a weaker Australian dollar and expansion plans focused on infant formula and cream cheese, which are segments that have already seen some growth.

Fortunately for Bega, it is exposed to the dairy industry with positive cash flows to support both organic growth and acquisitions of any businesses that would expand or complement existing operations.

Fonterra’s false-alarm food contamination scare confirms how important infant nutrition products are to China, leaving plenty of room for Bega to continue growing this business segment with assurance there will be a market there. 

Now for Bega investors, it looks like the question is how quickly can the dairy specialist grow revenues.

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