Saputo may launch knock-out blow for Warrnambool

Analysts and bankers expect the Canadian dairy giant to offer as much as $8 a share for Warrnambool, possibly next week.

Saputo Inc is expected to trump Murray Goulburn Co-operative Ltd’s $7.50 a share takeover offer for Warrnambool Cheese and Butter Factory Ltd by offering to pay as much as $8.

Warrnambool shares today rose as high as $7.98, suggesting investors expect the Canadian dairy giant may announce an improved bid for the Victorian dairy company.

A new Saputo offer, if it eventuates, would seek to take out competitors Murray Goulburn and Bega Cheese Ltd, which started the takeover battle for the Victorian dairy producer last month.  

“Saputo will go for a knock-out to take Murray Goulburn out of the game,” says Mark Topy, an analyst with Canaccord Genuity.

Topy expects Saputo to improve its $7 a share offer, as much as $7.56 once franking credits once a special dividend are added, to between $7.80 and $8 a share.

“The Canadians have got more firepower than the other bidders,” he says. “Adding another 50 cents to its bid will not move the dial much for Saputo.”  

Saputo’s market value is C$9.97 billion, dwarfing Bega’s $589.8 million, as well as Warrnambool’s $441.6 million.

Murray Goulburn may not be able to respond to an improved Saputo offer because its finances are stretched.

Topy estimates a Murray Goulburn and Warrnambool merger would result in Murray Goulburn shouldering $978 million of debt and $850 million of equity. That would leave the combined entity a debt-to-equity ratio of 115 per cent, he says.

Bankers would be reluctant, Topy says, to lend the cooperative more money to Murray Goulburn given such metrics, especially if dairy prices were to plunge.

But Murray Goulburn has the ability to issue an equity-linked security to help it garner more funds for a takeover, which could improve its debt-to-equity ratio, while asking National Australia Bank Ltd, Australia and New Zealand Banking Group Ltd and Westpac Banking Corp for more leverage to bolster its offer.

Still, there are no signs that Warrnambool’s board is deserting Saputo. Even if Warrnambool were to change its previous recommendation and support Murray Goulburn, Warrnambool has to give Saputo a five-day notice period.

That leaves plenty of time for Saputo to put together a response to Murray Goulburn.

Saputo’s bankers at Rabobank and Rothschild seem in no rush to table a counter offer to Murray Goulburn. But those involved in the takeover battle expect Saputo to boost its offer as early as next week.

The risk for Saputo is that its takeover offer, conditional on getting 50.1 per cent of Warrnambool shareholding support, will continue to be stymied by Bega and Murray Goulburn who together have 35 per cent of Warrnambool’s stock.

Murray Goulburn managing director Gary Helou and Bega’s chairman Barry Irvin have both said they don’t want a foreign dairy company owning another Australian dairy company in a local market already dominated by New Zealand’s Fonterra, Japan’s Kirin and France’s Lactalis.

The election of a coalition government, whose support partly rests on the backing of rural Australia, may make Saputo a target for nationalist feelings and concerns by politicians, especially from the National Party, that Australia’s most valuable assets are being sold to foreigners.

The Foreign Investment Review Board has to approve Saputo’s takeover.

Bega and Murray Goulburn, still largely seen as underdogs in the battle for Warrnambool, may have the last laugh.