Suitors mull 'super-sized' dairy operator

Bega Cheese executive chairman Barry Irvin says a super Australian dairy company could be formed if Murray Goulburn accepts its bid for Warrnambool Cheese & Butter.

Bega, which extended its offer for WCB on Wednesday, is locked in a $500 million-plus takeover battle for WCB with Australia's biggest dairy exporter, Murray Goulburn, and Canadian behemoth Saputo.

Since the bidding war began in September, analysts and farmer shareholders have suggested the possibility of Bega, which owns 18.4 per cent of WCB, and Murray Goulburn, which owns 17.7 per cent, joining forces to keep WCB in Australian hands.

Murray Goulburn managing director Gary Helou, who argues Murray Goulburn's bid would create a "super-sized co-operative" to take on the world, has rejected a merger with Bega. "The brutal reality is we are not going to sell into Bega," he told shareholders at Murray Goulburn's annual meeting last month. "Bega has got to sell into us, or merge with us. We are a co-operative. We don't want to mess with that structure. It's absolutely non-negotiable."

But Mr Irvin wasn't as blunt on Wednesday. "I suppose the reality is one of the ways of joining forces is one of us accepting the other's bid. But there have been no discussions in terms of that."

Bega's has declared its offer of 1.5 Bega shares and $2 cash for each WCB share (worth $8.60) is final. The offer was to close on Thursday but Bega extended to December 20.

Mr Irvin's comments came as New Zealand's Fonterra - Bega's biggest shareholder - on Wednesday moved to protect its balance sheet and slash its dividend payment in the face of tough market conditions.

The world's biggest dairy exporter cut its 2014 dividend forecast to NZ10¢ (9¢) from NZ32¢ in the face of "abnormal circumstances" as surging milk powder prices broaden the price gap between milk powders and cheese to record levels. Fonterra, which accounts for about 20 per cent of total global dairy trade and is the second-largest milk processor in Australia, estimates the widening gap between powder prices and other dairy products has had a negative $NZ800 million impact.

The dairy farmer co-operative said it expected earnings before interest and tax of $NZ500 million to $NZ600 million for the year ending July 31. The forecast EBIT is a huge drop on the previous year's EBIT figure of $NZ1 billion.

Units in the Fonterra Shareholders' Fund, which is listed in Australia and New Zealand, plunged 7.3 per cent on the ASX to close at a record low of $5.19 on Wednesday.

Fonterra said it would maintain its record 2013-14 farmgate milk price of $NZ8.30 a kilogram of milk solids, but decided not to meet the theoretical farmgate milk price of $NZ9 a kilogram.

The forecast milk price is based on processing and manufacturing milk powders. The soaring cost of powders means margins on its other dairy products are being squeezed by the high cost of milk.