The Distillery: Girt by cheese

Not all jotters are convinced by Murray Goulburn's decision to pull out the national interest card in its Warrnambool bid.

The chase for Warrnambool Cheese and Butter intensified on Friday with Murray Goulburn entering the fray. Given the declared interest of Saputo and Bega Cheese, Warrnambool now justifiably feels like the prettiest girl at the prom.

For now, the decision of which hand to choose is an easy one, with the latest bid trumping those it already had to mull over. But that is likely to change, with a few twists and turns in the chase still ahead, according to the commentariat.

The Australian’s Richard Gluyas, for one, anticipates more bids ahead, with the valuation of the group potentially topping $500 million before bid fatigue sets in. And he sees two good reasons for the intense pursuit.

“The prize with WCB is two-fold. First, the company's home base in Victoria, along with Tasmania and New Zealand, is one of the cleanest and most efficient milk-producing areas in the world, up to the farm gate. Second, as Murray Goulburn's highly ambitious boss Gary Helou said yesterday, WCB offers the opportunity to build scale for the incredibly lucrative opportunity associated with explosive growth in the Asian middle class.”

Murray Goulburn has an issue with competition law, however, given its battles with the ACCC when it last bid for Warrnambool Cheese and Butter a few years ago. This time the group is going straight to the Competition Tribunal and its boss, Gary Helou, will push a strong case for the national interest, according to Fairfax’s Adele Ferguson.

“What (Helou) will be arguing is that if Murray Goulburn is successful it will be the farmers taking back the power. As a co-operative, if it successfully merges with the cheese and butter group, the profits will be used to pay higher farmgate prices for milk. This will help the farmers reduce debts and reinvest in the community…It is a powerful public-interest argument that will be used to persuade the tribunal to give the merger the all-clear.”

The Australian Financial Review’s Chanticleer columnist, Tony Boyd, also views merit in the arguments put forward by Murray Goulburn given the strength of dairy co-ops around the world.

“Helou says the merger would create a global champion. The company believes that having 40 per cent of the Australian milk market under one roof would enhance exports. Dairy co-operatives have a long history of success in global export markets. Four of the top eight milk suppliers in the world are co-operatives. The two largest are Fonterra in New Zealand and American Dairy Farmers.”

The Australian’s John Durie, however, isn’t convinced the tactic will work.

“(Helou) is modelling his argument on New Zealand giant Fonterra, arguing the Australian industry is suffering from a badly handled deregulation and needs consolidation via a farmer friendly co-op... That is an heroic task because MG is just one tenth the size of Fonterra and will essentially be a price taker whatever happens.”

Meanwhile, the Herald Sun’s Terry McCrann explains the challenges for Australian dairy companies to succeed in light of the power of our major retailers. It is unfair, he contends, and calls for more common-sense from competition regulators.

“Food and dairy groups are being squeezed towards and indeed into bankruptcy by what is undeniably the most powerful market force operating in Australia. Yet they are restricted and even prohibited from building some countervailing power. No-no; that would be 'anti-competitive.' Does the supposed competition regulator, the ACCC, have any understanding of the power that Woolies and Coles deploy?”

The Australian’s Robin Brumby takes a broader look at the agriculture sector in Australia and wonders if we are missing out on the best investment opportunity in a decade.

Moving to markets, the ASX has been home to a brief burst of IPO activity and that is likely to turn into a flurry before year’s end. Chief among the protagonists is Nine Entertainment’s David Gyngell, who is heading the media group’s push toward a December 9 listing. Fairfax’s Elizabeth Knight delves into his strategy and finds a rare departure in CEO speak from the usual ‘keeping costs down’ tale.

The Australian’s David Uren also discusses the recent life in the IPO market, which he labels the “most encouraging sign from the sharemarket”. The potential for a further boost lies in the still subdued M&A sector. Risks to investors, however, remain present, particular in Europe, according to the AFR’s economics editor Alan Mitchell.

Mitchell’s colleague David Bassanese, meanwhile, believes the door is open to interest rate cuts early in the new year. Terry McCrann, this time writing in The Australian, also considers the door to be ajar, but conflicting forces may force the central bank to sit tight.

Finally, Fairfax’s Michael West jumps into an “infamous tax-driven trade” at Macquarie from 2008, which may now be coming back to bite.