Can a $319 million bid bring about a mega merger in Australian food and get through what will be a close examination by the competition regulator, ACCC?
Bega Cheese (BGA) has made a full takeover bid for Warrnambool Cheese and Butter (WCB) which, if successful, would create one of Australia’s largest listed food companies with revenues of $1.5 billion a year.
Bega, which is associated with the giant NZ diary mega company Fonterra, has made a cash and shares big which values Warrnambool shares around $5.78, a 28% premium to Wednesday’s closing price of $4.51.
Bega Cheese now owns 18% of Warrnambool Cheese, but rival Murray Goulburn has a 16.3% stake in Warnambool and the capacity to frustrate the offer without making a bid of its own, if that’s what it does.
In late 2009 Murray Goulburn made a bid for Warrnambool, but this was rejected due to competition issues. Bega bought shares and topped up, as did Murray Goulburn.
Because of that rejected offer, analysts reckon Murray Goulburn, with annual sales of $2.4 billion, will struggle to get approval from the ACCC for an offer which would clearly reduce competition in the major areas of milk and cheese and other products in the country’s big supermarket chains.
But the ACCC is of a preliminary view that the proposed acquisition does not appear to raise competition concerns. The ACCC has still to formally approve the deal, or state that it will not object to the takeover, following an informal review of the offer.
News of the Bega bid saw Warrnambool shares surge $1.36, or 28%, to $5.77 on the news yesterday. Bega shares jumped 5% to $3.33 as investors saw the logic in the offer.
WCB Vs BGA YTD – Bega Cheese sees Warrnambool as a tasty prize
A takeover from Bega would build a group capable of offsetting Murray Goulburn’s market size, but the role of Fonterra in the deal will be queried.
On the Fonterra website, the company says it is not controlled by Fonterra, but has licensing agreements with the NZ giant.
"In 2001, Bega cheese franchised out its marketing function, and today it is a highly-valued strategic partner of Fonterra Brands Australia. Our strong and mutually beneficial partnership is centred on successful, secure license agreements. Bega is a proud Australian brand and Fonterra is proud to be part of it. Bega is a publicly listed company, owned by shareholders. Fonterra has a proud, strong and mutually beneficial partnership with Bega centred on successful, secure license agreements."
But license agreements can be considered another way of controlling a second company and giving Fonterra a bigger than apparent role in the Australian diary industry, especially at retail levels. Without those agreements, would Bega be as big as it is today?
Licensing agreements are sometimes just as powerful as actual shareholders in controlling the affairs of another company. So Fonterra’s role is likely to be closely looked at by the ACCC to see if it would have defacto control over a merged company.
With foreign investment a growing worry for many in the bush (the Archer Daniels bid for Graincorp is triggering a lot of concerns, especially inside the new Abbott government)), the involvement of the giant Fonterra group (it’s the biggest dairy products group in the world), will raise eyebrows among many in the National Party and the dairy industry. But according to the Bega 2013 annual report, Fonterra doesn’t have an identifiable shareholding in Bega.
And analysts reckon that Coles and Woolworths won’t be keen to see a new, big player created with the clout to reject the growing pressure the big retailers are placing on their suppliers for higher fees and marketing support.
Bega executive chairman Barry Irvin said the merger would include Tatura Milk and create a business operating at more than seven sites, producing 353,000 tonnes of dairy products, generating revenue of $1.5 billion.
‘‘Customers, dairy farmer suppliers and employees will also benefit from being associated with a larger, more diversified organisation, an enhanced market position and a scale that is globally relevant,’’ he said in a statement.
Entities holding Warrnambool 10,000 shares will receive 12,000 Bega shares along with $20,000 cash under the offer.
‘‘WCB shareholders are being offered shares in Bega which has a record of strong financial performance and value creation,’’ Mr Irvin said.
‘‘While the potential synergies are substantial, we intend to deliver them while preserving WCB’s identity and brands.’’
In the year to June, Bega had revenues of $1.01 billion and after tax profits of $25.4 million, both up on the 2011-12 figures.
