Bega Cheese clears debt, wins 'dairy war'

JANE WARDELL
Last updated 09:35 17/01/2014

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Bega Cheese will walk off with a pile of cash and a kingmaker role in Australia's "dairy wars" after virtually handing control of the country's oldest milk and cheese producer to a Canadian suitor.

Bega agreed on Thursday to sell its 18.8 per cent stake in takeover target Warrnambool Cheese and Butter Factory Holdings to Saputo.

That effectively ends a takeover battle Bega itself started last year but abandoned as bids spiralled.

With the dust about to settle on one Australia's most intense bidding wars in years, Bega now has a A$70 million ($74m) windfall, wiping out debt and freeing up funds for new products or acquisitions.

Its position of strength, along with company statutes that would deter bidders, also means it hopes to stay independent even if international suitors call in what has become one of Asia's hottest food and drink sectors.

The intensity of the struggle for Warrnambool - nine bids or counter-bids since last September - reflects huge interest in Australia's agriculture assets amid surging demand from increasingly affluent southeast Asia for both high-tech milk extracts and traditional dairy products.

"Some might debate who actually got first prize," Bega chairman Barry Irvin told Reuters in a telephone interview.

Irvin was speaking after Bega said it would sell its shares in what has become the world's most expensive dairy company on a price-to-earnings basis, according to Thomson Reuters data.

"Turning a A$30m investment into A$100m of value is obviously not without its comforts," Irvin said, referring to the surge in Warrnambool's shares since Bega's first offer.

With sales exceeding A$1 billion ($1.1b) last year, Bega is the largest cheese-cutting and packaging company in Australasia.

Warrnambool stock rose amid counterbids from both Saputo and fellow Australian dairy producer Murray Goulburn Co-operative. With 45.2 per cent of Warrnambool already in its hands, Saputo's anticipated winning offer is likely to eventually value Warrnambool at a sizeable A$549m.

Irvin said Bega's decision to pull out of the race in late December as bid prices spiked was taken with a cool head - as was the decision to hold its stake until Saputo sweetened its offer.

"We remained disciplined and didn't allow ourselves to be distracted by the potential value that was being created by the bidding process," he said.

The bidding has hoisted Warrnambool's stock to the point where it now trades at 38.2 times its 12 months trailing earnings, according to Thomson Reuters data.

'RIDICULOUS PRICE'
The shares closed at A$9.40 ($10) on Thursday, up 1.3 per cent and close to the maximum Saputo has said it will pay if it receives at least 90 per cent acceptance rate for its offer.

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"The price that was paid, on an earnings basis, looks ridiculous," said Chris Kimber, managing director at Kimber Capital.

Mark Topy, a senior industrial analyst at Canaccord Genuity Wealth Management, said Bega had played the battle well.

"The price Saputo paid for Warrnambool is very high and we wait to see how they are going to justify that price," Topy said.

With plentiful milk resources and the technology to make advanced health-promoting products from them, Australia's dairy businesses remain in demand for companies keen to serve Asia's growing appetite.

Earlier this week, China's Bright Food (Group) said it had agreed to buy Australian cheese and yoghurt producer Mundella Foods.

The small, privately-held company specialises in probiotic yoghurt drinks and began exporting to Asia in 2010.

Bega is also branching out into high-tech areas.

Along with cheddar and mozzarella cheese, Bega makes whey protein concentrate - and the same milk extracts called neutraceuticals that made Warrnambool a hot target. It exports to 40 countries.

"It's in that high-value area where we are seeing demand and where we are seeing opportunities," Irvin said, adding that business development and infrastructure rationalisation were also potential areas of investment focus.

TAKEOVER TARGET?
Named for the small rural town in which it is based in Victoria state - its company slogan is "Real Town. Real Cheese." - Bega itself could be viewed as a takeover target, Irvin acknowledged. Its stock has surged 47 per cent since mid-September, closing on Thursday at A$4.62.

Some analysts have suggested that Saputo could move to consolidate its position in Australia, or that New Zealand giant Fonterra may step in.

But Bega is dealing from a position of strength: Irvin said the company is not for sale, stressing its corporate statutes contain hurdles to a hostile takeover.

Bega statutes currently limit any single shareholder to a maximum 10 per cent stake. If a takeover is offered at a premium to Bega's share price, shareholders can vote to change the statutes - but the vote needs 75 per cent approval to pass.

Saputo declined to comment on Bega's share sale.

Murray Goulburn, which with a 17.7 per cent stake has little hope of reaching the 50.1 per cent needed to make its offer unconditional, said it would "assess the ramifications" on both its bid and its shareholding.

Japanese beverage giant Kirin Holdings is expected to retain its 10 per cent stake to protect its distribution agreement with Warrnambool - particularly as Australia's "dairy wars" may not be over.

- Reuters

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