Canadians give local dairy a churn

Christmas is coming, and Canadian Dairy group Saputo's $462 million counter-offer for the Warrnambool Cheese & Butter Factory Company rings all the jingo bells.

Christmas is coming, and Canadian Dairy group Saputo's $462 million counter-offer for the Warrnambool Cheese & Butter Factory Company rings all the jingo bells.

A recommended cash bid from a foreigner that trumps a lower local one, from Bega Cheese? Kaching. A bid that targets one of the remaining Australian-owned operators in an industry that is already dominated by foreign companies? Kaching. A bid that targets a company that has farmer shareholders? Kaching.

Saputo's offer should create less waves than US group Archer Daniels Midland's $3 billion bid for Graincorp, however.

ADM's offer for Graincorp follows other takeovers that have left foreign groups in a dominant position in Australia's wheat export industry. It would see ADM take control of Australia's east coast grain export ports, and members of the Nationals wing of the Coalition government including Warren Truss and Barnaby Joyce oppose it. Treasurer Joe Hockey extended the deadline for delivering a foreign investment decision on the bid last Friday, citing its "size and complexity".

Saputo's offer for Warrnambool is about 15 per cent as big as ADM's offer for Graincorp. It doesn't threaten to radically change the shape of a dairy industry that already counts groups including Kirin, of Japan, and Fonterra, of New Zealand, as major players.

It also doesn't raise any obvious issues for Australia's competition regulator, the ACCC. Warrnambool's competitors do have competitive concerns, however, and they may shape the takeover battle.

Saputo listed in Canada in 1997 after riding the pizza boom, and founder Lino Saputo, his son and current chief executive Lino jnr and the family retained control as it completed 22 acquisitions in Canada, the United States and Argentina worth a total of $C4.2 billion ($A4.3 billion).

The first contact with Warrnambool occurred just over a decade ago, and Saputo went close to bidding in 2009 when the Murray Goulburn dairy co-operative was circling. Discussions were reactivated after Bega lobbed its bid in mid-September, and Lino jnr flew to Australia this week to win Warrnambool's support.

The Canadian group's market capitalisation of $C9.6 billion dwarfs Bega's market capitalisation of $A533 million, and it is offering $7 cash a share or $386 million for Warrnambool, about 80ยข a share more than the current composite value of Bega's initial share and cash offer. Taking debt into account, it is valuing the Australian company at $462 million, and Warrnambool's board has agreed not to actively shop for a higher bid. If it gets one and embraces it, a break fee of about $3.9 million is payable.

The Australian company is one of several potential buyers of milk produced by dairy farms in western Victoria, alongside groups including Bega, Fonterra and Murray Goulburn, and is only a minor player in the retail milk market, where the controversy over milk pricing in supermarkets has been raging.

About two-thirds of its production is solid milk products for the export market including cheese and milk powder. That is one of its attractions to Saputo, which is currently selling cheese and other milk products into Asia from its plants in Argentina.

The fact that Warrnambool is one of several milk buyers in its region combines with its export focus to make it an unlikely target of ACCC attention. The ACCC will in fact probably see the arrival of the Canadian giant as a plus for competition in this market.

Warrnambool's competitive potential under Saputo's wing could be an obstacle, however, because Saputo's bid is conditional on it getting at least 50.1 per cent of Warrnambool, and Bega and Murray Goulburn are both major shareholders, with stakes of 18.3 per cent and 17.2 per cent respectively.

Bega could raise its offer, but Warrnambool is becoming expensive. It earned only $25.5 million before interest, tax, depreciation and amortisation (EBITDA) in the year to June. EBITDA is predicted to bounce to between $47 million and $52 million this financial year, but on that basis Saputo is still valuing Warrnambool at a solid 8.9 to 9.8 times EBITDA.

If, on the other hand, Bega holds on to its stake in Warrnambool and Murray Goulburn also hangs in, almost 36 per cent of Warrnambool's shares will be locked up.

Saputo would need to buy three-quarters of the remaining shares to get past 50 per cent and trigger its minimum acceptance condition. That is possible, but only just - and the task could become impossible if a third dairy group, Fonterra, say, also independently decided to buy in. The battle may have a way to run.

mmaiden@fairfaxmedia.com.au

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