Fight for WCB could end in a stalemate
To many investors, the stories of an Asia-led Australian agriculture boom are as ancient as our wide, brown land. The relative low valuations of ASX-listed agribusinesses compared with their international peers suggest Australian investors remain cautious about this long-promised bonanza.
However, attraction to Australian-listed agribusinesses - particularly those with exposure to Asian markets - remains strong in certain quarters. Warrnambool Cheese and Butter (WCB) currently finds itself as the fair maiden with multiple suitors asking it to the dance.
Who's involved?
ASX-listed Bega Cheese owns 17.9 per cent of WCB. In mid-September, Bega offered 1.2 of its shares and $2 cash per WCB share. Based on Bega's opening price on Friday of $4.49, this values WCB at $7.74 a share (a material increase from the implied $5.89 when its bid was launched as Bega's shares have been caught up in the frenzy).
Murray Goulburn, a farmer co-op and Australia's largest dairy processor, owns 16.8 per cent of WCB. Murray Goulburn offered $7.50 a share in mid-October.
Saputo, a Canadian dairy company that has the support of WCB's board, bid $7 a share in early October and raised this to $8 a share on October 25 after Murray Goulburn's offer. Saputo had no direct interest in WCB as of that date.
Lion dairy and drinks - owned by Kirin Holdings of Japan - has this week reportedly paid $9.25 a share for a 9.99 per cent stake in WCB.
Lion has stated that it does not intend to make an offer for WCB but it does have a manufacturing arrangement with the company to produce Coon and Cracker Barrel brands that is up for renewal in 2015.
These key players collectively hold 44.7 per cent of WCB's scrip.
Before the Bega bid, WCB's shares closed at $4.51. The stock closed at $8.30 on October 31 for a market capitalisation of $465 million.
In a new twist, Fonterra, New Zealand's giant dairy co-op, snapped up a 6 per cent stake in Bega and was reportedly hunting around for stock to take a 10 per cent holding in Bega Cheese - the largest position a single shareholder can own in Bega under its current constitution. Fonterra holds the rights to market Bega Cheese in Australia.
What are the bidders paying for?
WCB's underlying earnings before interest, tax, depreciation and amortisation has averaged $27 million in the six years to fiscal 2013. This includes a 2008 peak of $48 million and the fiscal 2009 trough of a loss of $6 million.
WCB management has forecast a fiscal 2014 earnings range of $47 million to $52 million, on par with its best year at least since listing. The forecast result is achievable as was demonstrated in 2008.
The fiscal 2014 result will be supported by the impact of droughts in key supplier regions including North America and New Zealand over the past 12 months along with a weaker Australian dollar than in fiscal 2013.
Bloomberg consensus analyst earnings before interest, tax, depreciation and amortisation forecasts for fiscal 2014 are sitting at $43.3 million, about 60 per cent above the average since 2008.
Consensus forecasts appear to suggest that this strong rebound in earnings represents a new base. History tends to suggest that the earnings of agribusinesses will revert to the mean over the medium term.
Using an $8.30 share price and even using consensus forecasts for robust fiscal 2014 earnings per share of 36.1¢, on a price to earnings per share basis WCB is now trading at 23 times forward earnings. This is materially higher than the 12.6 times price to earnings it has averaged over a full commodity price cycle since 2008.
WCB's dance is still in full swing but the greater risk is that, with several interested parties holding blocking stakes, a successful bidder won't emerge in the foreseeable future, causing a stalemate.
While it is possible that a new, potentially $9-plus bid may emerge, it is also possible that a stalemate could make WCB's share price begin to sag.
In the three years before Bega launched its September bid, WCB's shares averaged $3.65. WCB shares have had a 127 per cent share price gain in the 12 months to October 31.
Frequently Asked Questions about this Article…
Warrnambool Cheese and Butter (WCB) is currently at the center of a bidding war with several companies holding significant stakes. This has led to a potential stalemate situation where no single bidder may emerge victorious in the near future.
Warrnambool Cheese and Butter (WCB) is currently the center of a bidding war with several companies holding significant stakes. This has led to a competitive environment with multiple offers being made for the company.
The main companies involved in the WCB bidding war include Bega Cheese, Murray Goulburn, Saputo, and Lion Dairy and Drinks. Each of these companies holds a significant stake in WCB and has made various offers to acquire more shares.
The main companies involved in the bidding war for WCB include Bega Cheese, Murray Goulburn, Saputo, and Lion Dairy and Drinks. Each of these companies holds a significant stake in WCB and has made various offers.
Bega Cheese offered 1.2 of its shares and $2 cash per WCB share, valuing WCB at $7.74 per share. Murray Goulburn offered $7.50 per share, while Saputo initially bid $7 and later raised it to $8 per share. Lion Dairy and Drinks reportedly paid $9.25 per share for a 9.99% stake.
Bega Cheese offered 1.2 of its shares and $2 cash per WCB share, valuing WCB at $7.74 per share. Murray Goulburn offered $7.50 per share, while Saputo initially bid $7 and later raised it to $8 per share. Lion Dairy and Drinks reportedly paid $9.25 per share for a 9.99% stake.
The potential stalemate arises because several companies hold blocking stakes in WCB, making it difficult for any single bidder to gain a controlling interest. This situation could prevent a successful acquisition in the foreseeable future.
WCB is attractive due to its exposure to Asian markets and its potential for strong earnings growth. The company's forecasted earnings for fiscal 2014 are promising, and its strategic position in the dairy industry makes it a valuable acquisition target.
WCB's underlying earnings before interest, tax, depreciation, and amortization (EBITDA) have averaged $27 million over six years, with a forecasted fiscal 2014 earnings range of $47 million to $52 million. This strong financial performance, along with exposure to Asian markets, makes WCB an attractive acquisition target.
The bidding war could result in a stalemate if no single bidder emerges successfully due to the blocking stakes held by various companies. Alternatively, a new higher bid could emerge, or WCB's share price might decline if the stalemate persists.
Before Bega's bid, WCB's shares closed at $4.51. As of October 31, the stock closed at $8.30, reflecting a significant increase in market capitalization to $465 million. This represents a 127% share price gain over the past 12 months.
WCB's share price has seen significant growth, closing at $8.30 on October 31, with a market capitalization of $465 million. This represents a 127% increase in the 12 months leading up to October 31.
If a stalemate persists, WCB's share price could begin to sag, especially if no new bids emerge. The uncertainty surrounding the acquisition process may lead to fluctuations in the stock's value.
WCB's management has forecasted earnings for fiscal 2014 to be between $47 million and $52 million, supported by favorable conditions such as droughts in key supplier regions and a weaker Australian dollar.
Fonterra, a New Zealand dairy co-op, has acquired a 6% stake in Bega Cheese and is reportedly seeking to increase its holding to 10%. Fonterra holds the rights to market Bega Cheese in Australia, adding another layer of complexity to the bidding process.
If a stalemate occurs, WCB's share price could begin to decline, especially if no new bids emerge. Historically, WCB shares averaged $3.65 in the three years before the current bidding activity.
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