Murray Goulburn's big future

The protracted, intense and rather peculiar three-cornered contest for control of Warrnambool Cheese and Butter is essentially over. The unanswered question is what Murray Goulburn does next?

Bega Cheese’s announcement today that it would sell its 18.8 per cent shareholding in WCB, pocketing a profit of between $61.8 million and $68.2 million on an investment of only $32.9 million in the process, will give Canada’s Saputo more than 45 per cent of its target, putting it within easy reach of control.

With the ‘’other’’ WCB suitor, Murray Goulburn, tied up in the Australian Competition Tribunal until the end of next month, there is no longer the prospect of a contest.

It is near-certain that, unless it wants to play spoiler, Murray Goulburn will also sell into the Saputo offer and pocket a profit similar to Bega’s. Murray Goulburn had out-bid Saputo, $9.50 a share to $9 a share, but needed the ACT’s clearance for its offer to go live. Saputo’s offer could rise to $9.60 a share if it achieves full ownership of WCB.

So, a process that started back in September and has seen WCB’s value double over that period, is almost over. The WCB board, which consistently backed Saputo – from its initial $7 a share bid – despite the higher alternatives, will be pleased.

Murray Goulburn, the big co-operative which is in the midst of an aggressive expansion mode under chief executive Gary Helou, would have gained both substantial synergies and scale had it been able to freely enter the contest and acquire WCB. There isn’t a better fit for Murray Goulburn than WCB.

Helou, who has started a process – which was quite independent of the outcome of the WCB bid --  to create access to capital for the co-op – isn’t going to give up on expansion just because he’s missed out on WCB. He’s trying to position Murray Goulburn for growth in demand for dairy products in Asia that is running at two or three times the capacity to supply those markets.

With the cash from its WCB shareholding – about $95 million, most of it profit, if Saputo ends up with 100 per cent of WCB – and access to external capital through the proposed new capital structure that will separate economic and voting interests to maintain farmer ownership of the co-op, Helou will have a bigger war chest.

He could try for a second prize and target Bega but the synergies on offer aren’t as compelling as a combination with WCB that would have combined the two big sets of processing facilities milk pools and distribution systems in western Victoria. A merger with Bega wouldn‘t be anywhere near as strategic.

Helou, apart from carving about $100 million a year from Murray Goulburn’s cost base, has been pursuing an ambitious organic expansion strategy, investing in new processing facilities, entering the drinking milk market by striking a deal to supply Coles with liquid milk and getting the Devondale brand back onto supermarket shelves.

A rational option for redeploying the cash and capital released from accepting the Saputo bid would be to try to attract WCB’s milk suppliers by offering higher farmgate prices. Saputo, having paid a very big price for WCB, will be looking for some kind of return on its investment so WCB could put pressure on its new competitor and/or reduce its access to milk.

Farmer members of Murray Goulburn will, once the capital restructure (which will take some time) has been completed, still retain control of the co-op but will also have a tradeable piece of paper that reflects its underlying economic performance. Under the proposed approach, modelled on the successful Fonterra restructuring in 2012, Murray Goulburn would also be able to access external capital to fund its expansion.

Murray Goulburn has made it apparent in its submission to the ACT and other public utterances that it is convinced that, for Australia to properly participate in the Asia dairy opportunity, capital – whether through the sale of their economic interests, borrowings against them, dividends or farmgate prices -- has to be pushed back towards the farmers so that they can expand their production and reverse the industry’s declining footprint and share of the global market.

As the major dairy co-op Murray Goulburn is better structured than any of the other key players to pursue a growth strategy driven from the farm level.

From a narrow national interest perspective it is a pity Murray Goulburn didn’t get the opportunity, at least, to properly compete for control of WCB and the ability to try to create an Australian-owned and based dairy business with the scale and platforms to attack the opportunities in Asia.

Helou’s conviction that Murray Goulburn needs to participate in that Asian demand surge, however, means that it is probable that he will continue to look for other means to achieve that same end.