DataRoom AM: Warrnambool cheese party

Canada’s Saputo may have delivered a knockout blow in what was once looking a one horse race for Victorian-based Warrnambool Cheese and Butter. All eyes now turn to recent bidder Bega and former bidder Murray Goulburn – whose significant stakes could play spoiler – and Treasurer Joe Hockey, who has another foreign takeover to ponder.

Elsewhere, Fairfax and Macquarie Radio remain tight lipped on a merger, Air New Zealand appears to have made good on plans to move up the register at Virgin, Macquarie jostles for the front seat in the pursuit of Lloyds’ Australian operations and a report shows how benign M&A activity has been in Australia this year.

Warrnambool Cheese and Butter, Bega, Murray-Goulburn, Saputo, Joe Hockey

The board of Warrnambool Cheese and Butter has been adamant in its position not to engage with Bega, and yesterday it became obvious why – it had another suitor ready to enter the fray. In news that would have made shareholders smile and Treasurer Joe Hockey wince, Canada’s Saputo launched an all cash bid at $7 – around 12 per cent higher than the unsolicited Bega offer. Importantly, it received the full backing of the WCB board, in the absence of a better offer.

It appears that ever since Bega first lobbed a takeover proposal WCB’s way, Saputo has been working on a counter offer with regular dialogue being held with its target about an appropriate value.

For Hockey it is bad news. Already confronted with a challenging decision on the Archer Daniels Midland bid for GrainCorp, he now has to decide whether to give the green light to another foreign takeover. Both deals are likely to get the tick from the Foreign Investment Review Board and the treasurer, but given the Nationals will be set against both, the decisions won’t be easy for Hockey. Indeed, you wouldn’t blame him for thinking like a WCB shareholder and hoping Bega ups its offer.

Investors haven’t ruled that out, with WCB notably closing above the $7 Saputo offer. All day the shares of the dairy group, which closed 12 per cent higher, stayed at least 2 per cent above the offer price of Saputo. Then again, the pricing action may simply represent recognition of the option for a special dividend from within the $7 offer that could be worth as much as 56 cents thanks to franking credits (conditional on a number of factors).

A bidding war does appear a stretch given Bega’s small size compared to top ten global player Saputo. It may have one more offer up its sleeve but if Saputo really wants WCB, it has the firepower needed to get it done.

Even assuming no other bid is forthcoming, the path to a final deal is home to a few hurdles, particularly with regard to the shareholdings of Bega and Murray Goulburn. Together the two former bidders for WCB (Murray pitched an offer in 2009) have around 36 per cent of the dairy group’s stock. Saputo needs to get to 50 per cent to trigger the minimum acceptance clause and that will be a challenge if the two major shareholders don’t play ball.

For now, it seems assured that Bega is not interested in dealing with Saputo, but Murray has remained eerily quiet for a while. The latest it offered was a press release yesterday saying it “will now take time to consider its options.” Stop the presses.

Indeed, those comments from Murray Goulburn were almost word-for-word what it had said when first commenting on the Bega proposal on September 13. Given it was still considering its position on that deal come news of the Saputo offer, a detailed response is not expected soon.

Regardless of what happens, shareholders of Warrnambool Cheese and Butter can be well pleased with their investment over the past month. The company’s shares have climbed 60 per cent in value since Bega first made its intentions known on September 12.

M&A activity

The action surrounding Fairfax Radio (see below) and Warrnambool Cheese and Butter represents a glimmer of light in what has been an otherwise poor year for mergers and acquisitions.

Overall deal value is only $0.3 billion above last year’s tally through the first nine months, which makes it the second worst year since 2007, according to Mergermarket.

The deals really eased off in the September quarter, falling from $18 billion in the second quarter to just $10.1 billion as companies kept a watching brief on the theatre of the election.

Energy, mining and utilities remains the busiest sector, but despite the deal count being similar to last year, the value of the deals is down over 30 per cent. This could be symbolic of both a cautious approach leading to smaller deals and lower valuations in light of soft metal prices through the first half of the year.

UBS heads the financial advisor ladder by deal value, with Macquarie Group leading the way in terms of deal count. Herbert Smith Freehills, meanwhile, hangs onto top spot by value amongst legal advisors, while Allens has risen to the head of the deal count leaderboard.

Virgin Australia, Air NZ, Virgin group, Richard Branson

In aviation, Air New Zealand may have quickly made good on its plans to creep up to 25.9 per cent of Virgin Australia, buying $30 million worth of stock off-market yesterday, according to the The Australian Financial Review. The seller of the stock has not been identified, but the most likely to offload such a stake would be Richard Branson’s Virgin Group, which sold a large package to Singapore Airlines earlier in the year.

Both the Singapore Airlines off-market trade and the one made last night were at a price of 48 cents, significantly above yesterday’s closing price of 42 cents.

While stock was being shifted in Virgin, the airline was busy finalising a financing deal. The ASX-listed group said it would receive $US732.6 million ($A775 million) through the issue of an enhanced equipment notes offering. The order book was heavily oversubscribed, with proceeds to be used to pay down existing financing facilities.

Fairfax Media, Macquarie Radio Network

Statements from Fairfax Media and Macquarie Radio Network have done little to hose down speculation of an imminent merger. Forced to respond to questions about continuous disclosure obligations, both groups said there had been “no decisions made” to merge.

“Fairfax receives approaches from, and has discussions with interested parties from time to time, but has nothing to announce at this point in time” the group informed the market, in perhaps a hint that Macquarie had been the initiator of recent talks.

The responses are of little surprise as if a deal had been arranged, it would have already been announced to the market.

As we mentioned in this column yesterday, there’s still a few questions marks about the deal – largely relating to the structure of such an arrangement. Macquarie appears more eager to wrap up a deal but its smaller size complicates any takeover.

ASX Limited

The chief executive of ASX Limited, Elmer Funke Kupper, has poured cold water on the likelihood of consolidation amongst Asian bourses. Speaking at a business luncheon in Melbourne yesterday, Kupper said the group had no merger plans and was under no pressure to chase deals given there is no pressure for scale. Such pressure only existed in US and European markets, he argued.

The company had agreed to an $8 billion buyout from Singapore Exchange in 2011 but it was blocked by then treasurer Wayne Swan on national interest grounds. Two years on, the group’s market cap remains well below that deal value, currently resting at $6.6 billion.

Wrapping up

The race for the Australian operations of Lloyds is down to two, according to the AFR, with the British-based group to choose between Macquarie Bank and Westpac within the next 24 hours. The latter has long been considered the frontrunner, but the AFR believes Macquarie may have tabled a marginally better price, although its plan to exclude some loans may run against it.

In IPO news, China’s mobile marketplace 99wuxian enjoyed a strong first day on the ASX. The listing was pursued to raise $20 million and investors clambered to get a piece of the action when the stock hit market screens. It closed up 12.5 per cent at 45 cents, though at one stage was a staggering 50 per cent above its listing price. Elsewhere, the bookbuild for OzForex is due to be carried out today and the $440 million float is certain to be oversubscribed, according to the AFR. The company’s stock will begin trading on Friday.

Meanwhile, Victorian Treasurer Michael O’Brien has reportedly been parading the Port of Melbourne asset to potential investors in North America this week, with a sale of Australia’s busiest container port – with the add-on of Port of Hastings – potentially worth upwards of $5 billion.

Finally, metallurgical coal group Cokal has savaged something from the wreck of its proposed deal with Singapore’s Blumont, arranging a loan facility of up to $US8 million. A $124 million takeover was all but sealed until a collapse in Blumont’s share price on Friday altered the value of the deal materially. Negotiations are continuing on a revised proposal.