Who will blink first in Goodman Fielder's staring contest?

There is a sense of déjà vu in Goodman Fielder’s near-instant and very emphatic rejection of the $1.27 billion takeover approach from Singapore’s Wilmar International and Hong Kong’s First Pacific Company.

In late 2002 New Zealand entrepreneur Graeme Hart’s Burns Philp launched a bid for Goodman Fielder which was instantly and aggressively rejected by a board that appeared confident it could either drum up a counter-bid or stare Hart down. A few months later and he had wrapped up control of Goodman Fielder after increasing his offer by a paltry 2 cents a share to allow the board to save some face.

Today Goodman Fielder revealed it had received a "non-binding, highly-conditional proposal" from Wilmar and First Pacific for a scheme of arrangement takeover at 65 cents a share. The target’s board said it believed the proposal "materially undervalues Goodman Fielder and is opportunistic."

The approach is opportunistic in the sense that it follows the material downgrade earlier this month of Goodman Fielder’s earnings guidance for this financial year, with the group saying it expected earnings before interest and tax to come in between 10 per cent and 15 per cent below analysts’ expectations. That produced a sharp sell-off in the group’s shares.

Goodman Fielder was vulnerable to Graham Hart’s leveraged offer because of its chronic poor performance. Apart from the brief period of Burns Philp’s ownership, when the group was sliced, diced and heavily restructured, it has struggled to generate consistent or respectable earnings since its formation, with some assistance from John Elliott, in the 1980s.

It has not been for want of effort. Goodman Fielder has been in almost continuous restructuring and cost-cutting mode since its original formation as Goodman Fielder Wattie in the mid-1980s. It is in the midst of a new cost-cutting program at present, aiming to strip another $25 million from its cost base through headcount reductions. It is also looking to sell its NZ dairy business.

Goodman Fielder’s problem has been that it operates in an intensely competitive sector with highly volatile raw material costs but sells its manufactured foods primarily into the very concentrated supermarket sector. Woolworths and Coles aren’t noted for their generosity towards suppliers.

It hasn’t helped that its relatively poor financial performance has handicapped its ability to invest in its plants and brands and to drive any meaningful top-line growth.

Wilmar is a major Asian-focused agribusiness group which demonstrated its interest in the Australian market with the 2010 acquisition of CSR’s Sucrogen business. First Pacific is an investment house with interests across a range of sectors, including food and agribusinesses.

They appear to believe that the combination of their financial resources and Asian distribution networks would provide Goodman Fielder with the opportunity to escape the difficult confines of its home markets and, with investment in its plants, create scale and a growth path.

Wilmar already owns 10.1 per cent of Goodman Fielder, which underscores the seriousness of the approach.

With Perpetual and Ellerston Capital owning more than 23 per cent of Goodman Fielder between them, and apparently unhappy about the recent earnings downgrade, there is a risk that in so quickly dismissing the approach without engaging with their suitors the defending board might drive its two key shareholders into their arms.

The Goodman Fielder board does have some leverage, given that the prospective bidders want to execute the acquisition via a scheme of arrangement and therefore need the board’s support.

Unless they can drum up competition for control, however -- and that’s unlikely -- they may need to engage with their suitors to see whether the terms of the approach -- which aren’t out of kilter with similar transactions -- can be improved.

With Wilmar already on the register and some other restless big shareholders, an attempt to stare Wilmar and First Pacific down and hope that they will just go away after the initial rejection is unlikely to pan out well for the target board or their shareholders.