The Bega Cheese (BGA) bid for rival Warrnambool Cheese and Butter (WCB) might not be fair, as an independent expert’s report claimed yesterday, nor is Bega willing for the moment to sweeten its offer. But despite these negatives, the value of the offer continues to rise.
At the close of business yesterday it was worth $6.60 for the 1.2 Bega shares and $2 cash on offer for each Warrnambool share. Bega shares ended up one cent at $3.83 but Warrnambool shares eased 4c to $7.23.
When announced on September 12, the bid was originally worth $5.78 for each Warrnambool share, so the market has moved decisively in favour of Bega’s bid, helped by the appearance of a rival and expectations of another round of bidding.
And, at $6.60, it is only 40c short of the $7 a share from Saputo of Canada, which some analysts reckoned was a knockout offer.
The Saputo offer was revealed on October 8 by Warrnambool.
That saw Bega shares dip to $3.50. Since then they are up 9%, despite the weak trading conditions generally flowing from the US debt and budget impasse.
BGA Vs WCB 1Y – Bega closing in on Warrnambool
That’s a vote of confidence from hedge funds and other speculators that this takeover battle still has a way to play out and Saputo or Bega will have to add a bit of money to their offer to get its bid over the line.
Complicating matters are the 35% of Warrnambool held by Bega (18%) and rival Murray Goulburn (17%), the big Co-Operative.
Despite the 50.1% acceptance condition in its offer, Saputo will want 100% control of Warrnambool to be able to fully consolidate it into its accounts and businesses. That means more money will have to be offered to win.
Investors yesterday seemingly ignored the independent experts report which concluded that Bega’s takeover bid for Warrnambool was not fair or reasonable.
But the same report showed that Saputo’s offer is at the bottom of the value range.
Warrnambool commissioned KPMG Corporate Finance to examine Bega’s September 12 offer and report, which it did yesterday and found that WCB shares were valued at $6.96 to $7.49.
But the way Bega shares keep on rising is narrowing that gap and increasing the chances that Bega may either force a win or get taken out at a much higher price.
KPMG concluded the offer of $2 cash and 1.2 Bega shares for each Warrnambool share is "neither fair nor reasonable to WCB shareholders".
To reach this conclusion, KPMG said the bid was on the skinny side of fair because of the potential for WCB to improve on its recent performance because of export market recovery and a lower Australian dollar.
The KPMG report assessed the Bega offer as being worth between $5.77 and $6.08 a share. The market has made a mockery of that valuation.
WCB chief executive David Lord said in a statement yesterday that:
"The WCB board believes the independent expert’s findings validates its view that Bega’s offer is highly opportunistic as it was made before the full benefit of improved international market conditions and strategic initiatives," Mr Lord said in a press release issued with the KPMG report.
"In contrast, Saputo’s $7.00 all cash offer is within the value range for WCB shares assessed by the independent expert and reaffirms the decision of the board to unanimously recommend Saputo’s offer, in the absence of a superior proposal."
KPMG’s report does not include an assessment of Saputo’s offer.
Saputo’s $7 a share is barely there – four cents into the range. But the Bega offer continues to chew up the premium being offered by the Canadian company.
The KPMG valuation offers the prospect of another 25c to 50c a share being offered to win Warrnambool.
At the moment there’s no need for Bega to suggest any sweetening of its offer, as it did last Friday when it said it "does not presently intend to increase its offer consideration although it reserves the right to do so".
The market is doing that on its own.
