Warrnambool Cheese and Butter Factory’s (WCB) defence against the $320 million hostile bid from Bega Cheese (BGA) continues to take the predictable route.
First there was the ‘don’t sell’ recommendation to shareholders after Bega sprung the bid early last month. Then a later ‘don’t sell’ accompanied by the suggestion that the offer undervalued Warrnambool.
Then last week, the real advice to reject the Bega offer because it undervalued the improving outlook for Warrnambool, which suggested that Bega might want to add more cash to the table.
And then yesterday those improving prospects were converted into profit estimates which Warrnambool indicated were very, very tasty indeed – in fact the company said earnings could double in the current financial year.
"Continued improvement in market conditions experienced in the last quarter of the 2012/2013 financial year, plus higher margins due to the company’s business improvement and strategic initiatives, will deliver earnings growth," Warrnambool said.
"Earnings before interest, tax, depreciation and amortisation (EBITDA) in the 2013/2014 financial year are expected to be in the range of $47 million to $52 million, up from $25.5 million in 2012/13," Warrnambool Cheese said. Warrnambool CEO David Lord said the improved earnings outlook was one of the reasons why the company was recommending its shareholders reject Bega’s offer.
He said more details would be released later this month when the target’s statement is sent to Warrnambool shareholders.
Bega owns an 18% stake of Warrnambool, but needs the 17% stake held by rival Murray Goulburn to be sure of grabbing outright control and then moving on to 100%.
Murray Goulburn will emerge as the biggest shareholder in the merged company and $18 million in cash.
But it has debt pressures and would like more cash, which would come in handy.
So can Bega add more cash?
Bega is offering 1.2 of its shares plus $2 cash for each Warrnambool it doesn’t already hold.
Bega shares rose 3c to $3.60 yesterday, while Warrnambool shares ended at $6.21, up 5c.
BGA Vs WCB YTD – Warrnambool rejects, but Bega shares still rising as markets like the bid
The offer valued Warrnambool shares at $5.78 a share when announced on September 12.
That has now risen to $6.31, a rise of around 8% or more than $25 million.
Seeing Warrnambool profits are now forecast to recover from last year’s 50% fall, Bega could justify putting a bit more value in the offer, but some would argue that the higher value of the offer reflects the improvement at Warrnambool.
But it is quite likely that at some stage in the not too distant future, the Bega and Warrnambool boards will have a chat and a bit more cash will be put on the table that is acceptable to all involved and the the $1.5 billion a year in sales giant will be a reality.
