Helou buys time with over the top bid for Warrnambool

Murray Goulburn chief executive Gary Helou got something he wanted from Warrnambool Cheese & Butter after he boosted MG's bid for Warrnambool from $7.50 a share to $9 a share on Wednesday: a letter from Warrnambool's board to its shareholders telling them to do absolutely nothing.

It was a big improvement from a day earlier, when Warrnambool's board recommended shareholders accept the then leading offer of $8 a share from Canada's Saputo group, and Treasurer Joe Hockey gave Saputo foreign investment clearance.

MG knows it is unlikely to persuade the Australian Competition and Consumer Commission that a takeover of Warrnambool would not be anti-competitive, because both groups buy milk from the same farmer catchment. It therefore wants the Australian Competition Tribunal to rule that competition concerns are secondary to the public benefit in the creation of a larger, more competitive "Australian champion" co-operative, one that reinvests merger savings into farm gate milk prices.

It won't formally put its case until the end of this month, however, and might not get a decision from the tribunal for six months. Its big bid increase addresses the risk that Saputo will sprint ahead while it waits.

What next? Saputo might walk, but it might also boost its bid, and perhaps drop a 50 per cent acceptance condition that is unlikely to be satisfied while 45 per cent of Warrnambool is in the hands of third bidder Bega Cheese (18 per cent), MG (17 per cent) and Kirin's Lion group (10 per cent).

Bega is beginning to look like a spent force, but anything seems possible in the amazing battle, and Warrnambool's board did the obvious thing on Wednesday when it told shareholders to sit tight.

There was "ample time to make a decision" the board said, and that would have been music in Gary Helou's ears.

Since Bega lobbed the first bid two months ago, the takeover value of Warrnambool has doubled, but it has not become as surreal as you might think.

MG has upped its share offer from $421 million to $505 million, and is valuing Warrnambool at $580 million including debt on Warrnambool's books.

Warrnambool's after-tax profit halved to just $7.5 million in the year to June 30, and earnings before interest, tax, depreciation and amortisation fell by 28 per cent to $25.5 million. On that basis, MG's bid is pitched at an eye-watering 22.7 times EBITDA, and Saputo's offer is not far behind.

Warrnambool said in August, however, that higher milk powder prices in Asia and a lower Australian dollar were driving earnings higher, and in early October it predicted EBITDA of between $47 million and $52 million in the current year to June 2014. On that basis, MG is offering between 11.1 times and 12.3 times EBITDA.

In a review of Bega's bid, independent expert KPMG put the average Australian and New Zealand dairy company EBITDA multiple at 11 times 2014 earnings. Overseas dairy groups were valued at 9.4 times, and KPMG said a handful of dairy acquisitions in Australia since late 2007 averaged 10.9 times EBITDA.

The acquisition multiple average is swollen by Kirin's outrageously expensive $2.8 billion, 17.6 times EBITDA takeover of National Foods in December 2007, but MG's bid is not as far over the top as many think.

This is something Saputo knows as well, as it considers its next move, but MG is better placed to extract merger savings. One of its own dairies is about 10 kilometres from Warrnambool, and it acquires milk from the same farms.

MG's debt levels will jump if it gets Warrnambool, but conventional measures overstate the problem because its cost of doing business includes milk purchases at the farm gate that are in effect the way it rewards its co-operative members.

The group also told suppliers a few months ago that options for raising capital and funding expansion were being examined. An issue of non-voting listed shares to co-operative members is one possible post-takeover move. New Zealand's Fonterra got its gearing down from similar levels after expansion that way.

mmaiden@fairfaxmedia.com.au