Saputo moves closer to a whiff of the big cheese

Saputo's offer for Warrnambool reflects international firms' strong desires to establish Australia as a base into Asia, with a tasty premium to sway reticent shareholders.

The arrival of a white knight for Warrnambool  Cheese and Butter Factory in the form of Canadian dairy giant Saputo will throw up a fresh test of the government’s foreign investment credentials. It also caps years of ambition for Saputo to gain a greater foothold in the local market as a springboard to Asia.

Saputo Inc, Canada’s largest dairy processor, pulled out of its small European operations earlier this year to focus on higher-growth markets. The company, which had cheese manufacturing facilities in Germany and Wales, concluded that despite the attractive size of the consumer market, the limited access to milk made the European market too challenging.

But Australia, with its bilateral trade agreements in Asia, has been on Saputo’s radar for years. The country offers a stable and large source of low-cost raw milk for Saputo’s cheese products and a prime platform for international exports to Asia.

The latest chapter in the decade-long consolidation of Australia’s dairy market also has a sense of déjà vu about it. In 2009, Saputo made an approach to Warrnambool at $4 a share via a scheme of arrangement, but that deal was rejected.

The latest offer, which has been unanimously accepted by Warrnambool’s board, is all-cash, off-market at $7.00 per share, and values Warrnambool at $392.7 million.

The offer is subject to conditions including FIRB approval, minimum acceptance of more than 50 per cent of WCB shares, and includes an exclusivity clause that prevents WCB from entering talks with any rival bidder.

The offer should not raise any competition concerns, since Saputo does not own any other local businesses. For its part, Saputo said it could accelerate Warrnambool’s growth nationally and internationally, which would lead to greater demand for milk and benefit the processor’s suppliers.

The all-cash aspect of the deal will prove tempting not only to the 40 per cent or so of farmer shareholders on WCB’s register, but potentially also to Murray Goulburn with its 17.2 per cent holding, high debt levels and expansion commitments elsewhere. Bega Cheese Ltd is unlikely to have the financial wherewithal to raise its spurned $320 million offer, a bid weighted 65:35 between scrip and cash, above Saputo’s price.

The offer from Saputo reflects the keen desire of international companies to establish Australia as a base into Asia, and they are often willing to pay a premium for that chance — which local firms find hard to match.

The sequence of events is reminiscent of the fierce battle for Dairy Farmers in 2008, which eventually went to Kirin Holdings’ owned National Foods. Both Murray Goulburn and Saputo were underbidders for those assets. Murray Goulburn has been pursuing acquisitions for years, having made three unsuccessful approaches to Warrnambool starting in 2009, when it began building up its substantial shareholding, which now stands at about 17.2 per cent.

Warrnambool’s farmer shareholders will have to decide whether they can stomach ownership passing to another international firm. And so will Joe Hockey, who already faces pressure from the Nationals on the $3 billion Archer Daniels Midland bid for Graincorp. Foreign ownership of milk and wheat assets are probably not what anyone had in mind when promoting Australia as the food bowl of Asia.

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