Saputo confident it can win Warrnambool

Saputo Inc. is increasingly confident that its all-cash,  $7-a-share offer for Warrnambool Cheese and Butter Ltd will succeed.

Conditional on 50.1 per cent of Warrnambool shareholders accepting, Saputo says 38.5 percent of Warrnambool shareholders are people living in the Warrnambool region. They are predominantly current or former suppliers to the cheese and butter factory who prefer Saputo acquiring Warrnambool over Bega Cheese Ltd.

Last month, Bega offered 1.2 Bega shares plus $2 cash a share for Warrnambool. At the close of trading today Bega’s bid for Warrnambool is valued at $6.44 per share. Saputo says its superior offer puts it in prime position to win the deal.

Murray Goulburn Co-operative Co., an 18 per cent shareholder in Warrnambool which declined to comment, may come out in favor of Saputo’s bid. Lazard Ltd is advising Murray Goulburn.

Not so fast, says Bega’s advisor David Williams. Those who perceive Bega’s bid was dead after the Canadian diary giant’s higher offer have to think again, says the founder of Melbourne-based boutique advisory firm Kidder Williams.

Fund managers, Williams says, have been buying Bega and Warrnambool’s shares in the belief that Murray Goulburn may oppose the offer from Saputo, which is being advised by Rothschild and Rabobank.

If Murray Goulburn rejects the Saputo bid and accepts Bega’s rival offer, Murray Goulburn would become the single biggest shareholder in Bega and encourage industry consolidation, says Williams. The last thing 63-year old Murray Goulburn and 114-year old Bega want is another foreign dairy entrant eroding their market share and earnings and preventing consolidation, he says.

Still, Williams concedes that Murray Goulburn chief executive Gary Helou may have a price at which he is willing to sell his stake in 125-year old Warrnambool.

Warrnambool, for its part, says Bega cannot match Saputo’s offer and flatly rejects Williams’ rationale for the rise in Bega’s and Warrnambool’s share prices.  Bega’s share price is rising because it has an 18 per cent stake in Warrnambool. At Saputo’s offer of $7 a share, the Canadian company has added $24.92 million to Bega’s market value. If franking credits are added then Bega’s market value may increase by $30.52 million.

Saputo’s offer of $7 a share for Warrnambool is in actual fact $7.56 a share, once franking credits on the special dividend are added. Without Saputo’s offer, Bega’s shares are worth between 16 cents and 20 cents, including franking credits - less than the current price.

Williams declined to comment on Warrnambool’s numbers but did say: “If the market thought our bid would not get up, our price would have reverted right back to its pre-bid level and then added the value of the share price gain on Warrnambool shares. Instead it has powered ahead keeping all the gains from our bid.”