Murray Goulburn’s decision to decisively up the ante in the fierce three-cornered contest for Warrnambool Cheese and Butter underscores both its own determination and the strategic value of the regional dairy processor.
Over-bidding Canada’s Saputo by $1 a share has turned the takeover tussle into a two-party contest. The third bidder, Bega, which ignited the battle for WCB, doesn’t have the balance sheet to compete with bidders. Offering pure cash and adding more shares to its $7.24 a share cash and scrip offer would likely to see its shares sold down and the value of its bid little changed.
The scale of the Murray Goulburn offer – at $505 million it doubles the value of WCB relative to its pre-bid share price – is both a response to Joe Hockey’s decision on Tuesday give foreign investment approval to Saputo’s bid and more evidence of just how strategic the players believe WCB is.
Murray Goulburn needs Australian Competition Tribunal approval for its offer, which could take months – potentially up to six months – so it needed to put something on the table to force the WCB board, which clearly prefers Canada’s Saputo, to take it seriously and give it time. At the values now placed on WCB, its board should only be considering issues of value.
The arguments Murray Goulburn will inevitably put to the ACT provide some insight into WCB’s strategic value. Both WCB and Murray Goulburn source milk from western Victoria, one of the most productive dairy regions in the country. Both have big processing plants in the region and the duplicated logistics infrastructure to support their businesses.
There would therefore be significant cost synergies available from merging the companies and integrating their businesses.
Moreover, where the dairy industry in the rest of the country is essentially a supplier to the domestic market, Victoria – and WCB and Murray Goulburn – are exporters of dairy product and therefore have an exposure to the rising tide of longterm demand for dairy within Asia.
Combining the two would not only generate efficiencies and scale but, with two processing facilities close to each other, optionality that would enable them to optimise the balance of domestic and export production and sales.
The ACT’s test, unlike like the ‘’substantial lessening of competition’’ test used by the Australian Competition and Consumer Commission, is a ‘’net public benefit test.’’ Murray Goulburn will be able to argue that, as a co-operative, the benefits of the synergies, the increased scale and the optionality will flow back to farmgate prices and benefit the producers. It will also, no doubt, argue the national interest in creating an Australia-owned dairy producer among the top 20 in the world.
It is the impact on dairy farmers and raw milk production that is perhaps the most significant argument that Murray Goulburn can make.
The Australian share of the global dairy export markets has halved over the past decade; New Zealand’s has grown by nearly 25 per cent. In volume terms, Australia’s production is actually down about 25 per cent; New Zealand’s has doubled.
Part of the explanation lies in the co-operative style structure of the NZ industry and also in the extent to which it has production well in excess of its domestic consumption. Murray Goulburn would no doubt argue that by delivering the benefits of the synergies, through farmgate pricing and by increasing the emphasis on exports, it will increase dairy farmers’ income, enabling them to invest and to expand production in a virtuous cycle that would allow the Australian industry to capture a larger share of the longer term growth in demand expected across the region.
Saputo has promised to invest in WCB and to make it a platform for international exports without threatening farmgate prices but it isn’t a co-operative and doesn’t have the synergies that Murray Goulburn would have.
Against that its offer – and there is an assumption that it will be increased to counter Murray Goulburn – is cash, has cleared the foreign investment approval hurdle, is favoured by WCB and could probably get cash into the hands of shareholders well ahead of Murray Goulburn. Murray Goulburn might also be disadvantaged in the eyes of WCB farmer shareholders by its status as a competitor to WCB.
Both offers have minimum acceptance conditions of 50.1 per cent, which complicates matters given that Bega has an 18 per cent shareholding, Murray Goulburn 17.7 per cent and Kirin’s National Foods (to protect a cheese supply arrangement with WCB) just under 10 per cent.
A stalemate is possible unless either two of the players join forces or someone decides to sell.
National Foods is presumably focused on securing its supply, so it might be open to dealing with any of the parties provided they can provide reassurance that it won’t be threatened.
Historically, there have been competitive tensions between the dairy co-operatives (Bega is a former co-operative), which would need to be overcome if a deal were to be done between Bega and Murray Goulburn.
Bega has something like $90 million tied up in WCB at current prices and probably about $60 million of that would be profit, so it might be prepared to take a handsome consolation prize from the high bidder if the bidding is deemed to be too steep to continue.
Given WCB’s strategic significance, however, it is conceivable that the fallback strategy for all three bidders is to deny anyone else control in order to keep their own options alive.