Warrnambool's board is sitting pretty

Soon after Murray Goulburn Co withdrew its takeover offer for Warrnambool Cheese and Butter Factory Ltd in 2010, Craig Evans and Brodie Treloar, then bankers at Royal Bank of Scotland Group Plc, recognised it would not be the last potential deal Warrnambool would be confronted with.

Three years later Evans and Treloar, now at CIMB Investment Bank, are sitting pretty. Warrnambool, now a client, seems to be the most desired asset in Australia. Two local dairy giants, Bega Cheese Ltd and Murray Goulburn Co-operative Ltd and one international behemoth, Canada’s Saputo Inc, are all vying for the Victorian dairy company.

“It all comes down to price,” says one investment banker close to the deal.

Since Bega’s offer for Warrnambool that was worth $5.78 a share on September 12, Warrnambool shares traded as high as $8.28 on Monday, a 43 per cent increase over Bega’s offer. Saputo, with a $7 cash offer and then Murray Goulburn, with a $7.50 cash offer, have followed Bega and launched takeover offers for Warrnambool.

Warrnambool shares closed the day up 2.8 per cent at $8.11 after rising as much as 4.9 per cent.

Bega on Tuesday will probably get approval from shareholders to lift its limit on share issuance at its annual general meeting. That will pave the way for Bega to improve its takeover offer for Warrnambool.

But Barry Irvin, Bega’s chairman, and his advisor David Williams, the founder of boutique advisory firm Kidder Williams, are unlikely to make any move to improve their bid before a ruling by the Australian Competition and Consumer Commission at the end of the month.

Bega's offer of 1.2 of its shares plus $2 cash for Warrnambool was valued at $6.896 at the close of trading. The shares earlier rose as high as $4.21, valuing the Bega takeover at $7.052.

Likewise Bega’s rival Saputo seems in no rush to raise its offer. Saputo is dismissive of Bega’s offer, saying the value of its stock has been inflated because of its bid as well as Murray Goulburn’s offer. Rabobank and Rothschild, the bankers advising Saputo, are confident that unlike Murray Goulburn they are not facing any regulatory blockade to their acquisition plans.

Moreover, Saputo has the backing, for now at least, of the Warrnambool board. But its takeover offer, conditional on getting approval from 50.1 per cent of Warrnambool shareholders, faces a big hurdle: Bega and Murray Goulburn together have a 35 per cent stake in Warrnambool.

Murray Goulburn is going to embark on a charm offensive to support its takeover efforts. Managing director Gary Helou will be visiting the Warrnambool region to sell its takeover offer to local farmers, who make up as much as 40 per cent of Warrnambool shareholders. The world’s biggest dairy company, New Zealand’s Fonterra, Murray Gulburn and Warrnambool are the three major buyers of milk in western Victoria.

Warrnambool's Allansford factory, which makes cheese and powders, and Murray Goulburn’s Koroit plant, which makes butter and powders, are within about a 40 minute drive of each other. The sourcing of product and production plants makes Murray Goulburn’s takeover offer for Warrnambool the potential for the biggest synergies as any improvement in the combined entity’s business costs and margins would flow straight to the bottom line to the benefit of the cooperative’s farmers.

But the ACCC may want more than two milk buyers for western Victorian dairy farmers, putting pressure on Helou and its advisers at Lazard Ltd, chief among them John Wylie, to assuage such concerns.

Helou on Friday said he will appeal to the Australian Competition Tribunal, which has the power to review ACCC decisions granting or revoking takeover applications. Such a process, say Murray Goulburn’s detractors, may take months, making their bid meaningless, especially when two others exist.

Still, if Murray Goulburn can assure Warrnambool shareholders that anti-competitive concerns are a thing of the past, its bid and any subsequent improvement in the offer may trump rivals.

Lazard is working on Murray Goulburn’s capital structure. Wylie and his colleagues may be proposing the cooperative issue an equity-linked security that will attract investors and give Murray Goulburn added funds to improve its bid in the event of an improved offer from Bega and Saputo.

The prospect of higher bids for Warrnambool from all three companies will ensure Evans and Treloar and the Warrnambool board keep smiling.