Shareholders in Bega Cheese (BGA) and its takeover target, Warrnambool Cheese and Butter (WCB), meet today and Thursday, respectively, with the situation in a state of flux. The battle for control of Warrnambool has escalated quickly into a very pricey affair – one where it could be smarter to lose this round.
The $7.50 a share cash offer from Murray Goulburn on Friday has lifted the stakes in the battle, topping the $7 cash offer from Saputo of Canada and the share and cash offer from Bega that was worth just shy of $7 at the close last night.
The Murray Goulburn bid values Warrnambool at $420 million, Saputo’s offer has a value of around $392 million, and at the close yesterday, Bega’s offer is within sight of that at $386 million.
Bega shares jumped 5.1% to $4.08 yesterday and Warrnambool shares rose 22c to $8.11 as hedge funds and other traders punted on another, higher big emerging.
BGA Vs WCB YTD – Still going higher as BGA shareholders to meet today, WCB shareholders on Thursday
Today, Bega shareholders are expected to take a major step towards facilitating a possible higher price by voting to lift restrictions in its constitution that have prevented any one shareholder owning 10% or more.
Proxies are understood to be running heavily in favour of freeing up this restriction which would allow a scrip offer that would result in a shareholder (say Murray Goulburn via its 17% stake in Warrnambool) owning 10% or more.
Approval of the change would also allow Bega to make a placement to another company that may want to help finance the Warrnambool offer.
Some analysts point out that both Bega and Fonterra, the giant New Zealand dairy group, have close links.
The Fonterra website has this to say about the links with Bega:
"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." This is a situation many in the market have missed.
Following Murray Goulburn’s debt busting cash offer on Friday (the $7.50 is at the top of the valuation range for Warrnambool), it could be possible that Fonterra emerges as a partner in any big via a higher offer from Bega.
Fonterra hinted last Friday that it "was interested in the Australian dairy market". It is because of its existing operations (Mainland brands of cheese and other dairy products).
But such a move would have to go through competition scrutiny and would probably face a closer examination than Murray Goulburn which is trying to bypass the commission and go straight to the Australian Competition tribunal by playing the national champion argument.
But analysts point out that the Murray Goulburn offer would be funded by debt (it is a co-operative and can’t issue shares). Leaving aside its shares in Warrnambool, Murray Goulburn would have to find another $325 million to go with its $202 million at June 30, plus assume the $80 million debt on WCB’s books. That would see debt rise to 54% of assets in the merged company, against around 12% in Murray Goulburn at June 30.
To pay for the sharply higher interest cost, Murray Goulburn would have to cut costs, such as milk prices to co-op members, cut operating costs in the merged company by sacking staff or even rationalising and closing facilities.
That could be self-defeating and upset the existing co-op members who wouldn’t take lightly to having their returns cut, especially for a takeover. They are already facing pressure from the two big retailers, Coles and Woolies.
Bega played a bit of hardball yesterday, maintaining its takeover condition that no performance rights to shares be issued during its takeover (which closes at this stage on November 28.
But Warrnambool said it plans to seek shareholder approval at Thursday’s annual meeting to grant up to $175,000 in performance rights to its chief executive, despite opposition from Bega. Warrnambool says it will still proceed with seeking approval, but won’t grant the rights unless it is sure that the Bega bid will be unsuccessful.
"However, if the performance rights resolution is approved by WCB shareholders, WCB will not grant the performance rights to Mr Lord unless and until it becomes reasonably certain that the Bega offer is unlikely to result in Bega acquiring a majority of the WCB’s shares on issue," Warrnambool said yesterday.
