IT’S a plot with all the makings of a thriller. A sleepy 125-year-old dairy factory in southwestern Victoria, with languishing profits and a share register 40 per cent held by about 1500 local families, retired farmers and milk producers, suddenly becomes the flavour of the month.
Its shares shoot up from below $3.50 a year ago to a record $9.30 yesterday; three companies battle to outbid each other to win control; the anti-foreign investment, pro-Australian ownership card is played early; and a mysterious fourth bidder, probably Japan’s Kirin brewing company, enters the fray at the last minute.
That was the state of play last night, six weeks after Australian-owned Bega Cheese took its first hostile bite at bigger Warrnambool Cheese and Butter, bidding equivalent to $5.78 a share on September 12.
It was an opening gambit that valued the nation’s fourth biggest – and oldest – dairy processor, with its fleet of shiny milk trucks and sprawling cheese, butter, fresh milk, milk powder and whey processing plant at Allansford near Warrnambool, at about $324 million.
Since then, the bidding war has gathered momentum weekly. In a friendly offer immediately endorsed by the WCB, Canadian family-owned dairy giant Saputo – the 10th biggest dairy company in the world – soon outbid Bega Cheese, offering $7 for each of the company’s 56 million shares.
The nation’s biggest dairy processor, farmer-owned Victorian co-operative Murray Goulburn, was next to step into the ring, with a $7.50 counter bid, only to be trumped again last Friday by a potentially knock-out re-bid by Saputo – once again immediately recommended by the WCB board – of $8 a share, bestowing an astounding capital value of just under $450m on WCB.
Finally yesterday, in a bidding frenzy that stunned farmers milking their cows in the cool morning mist, shares rose to a record $9.30, as Australia’s second largest dairy processor, Japanese-owned Lion, entered the fray, with four million shares changing hands at more than $9 each in just the first two hours of trading.
Mark Rea, a retired Allansford dairy farmer, says he is resigned to the local company his grandfather James Rea helped found back in 1888 changing hands or being subsumed.
Rea, who has been a shareholder for 65 years and has watched the value of his family’s 100,000 shares soar, says as soon as Warrnambool Cheese and Butter factory became a listed public company in 2004, change was inevitable.
«I’m not sure which one I prefer or what I think,» Rea said last week, mirroring the views of many local dairy farmers at the packed annual general meeting. «I’m not keen on Bega because they seem a bit small; and while I’d prefer Murray Goulburn because they are Australian, they are carrying a lot of debt which worries me.
«And from everything I’ve heard, the Canadians are a good family company and have good plans to invest and expand Warrnambool Cheese and Butter.»
But why is the company such an attractive takeover target?
The raw figures revealed at last week’s AGM of the Stock Exchange-listed WCB, held in the coastal city’s Memorial Bowls Club, tell part of the story. At a time when Chinese and Asian demand for dairy products was skyrocketing, WCB chief executive David Lord told shareholders the company had suffered a «difficult year».
Affected by low global prices for dairy products, the high Australian dollar and a dry season, WCB – valued yesterday at $520m according to its record share price – reported a «frustrating» 50 per cent drop in after-tax profit to just $7.5m.
Sales revenue remained unchanged at $496m, international sales fell by $45m and the factory processed 3 per cent less milk than the previous year. The prices paid to WCB’s 570 farmer-suppliers for their 890 million litres of milk hit lows below their production costs.
Mount Gambier dairy farmer Lorraine Robertson told the meeting it was clear the company had become «a bit too complacent and comfortable».
«As a farmer, the fact that we got delivered the worst milk price for years and that half the farmers supplying WCB made a loss last year and are battling to survive indicates to me this company is not being well run,» Robertson said. «It’s got great farmers and milk supply but has become too complacent; it doesn’t surprise me that Bega, Murray Goulburn and Saputo all see it as a company they want to take over and run better.»
Saputo’s chief executive, Lino Saputo Jr, addressing his first supplier meeting with about 60 local dairy farmers at Timboon yesterday (more meetings will be held today in Mount Gambier and Warrnambool), was not quite so blunt, although he made it clear Saputo wanted Warrnambool, almost at any cost.
His rationale was that in Canada the company was unable to expand its size, reach and export potential because of a tightly regulated market that imposed production quotas on farmers and processors.
But in Australia – and specifically if it wins the battle to buy the languishing Warrnambool – Saputo sees an almost exponential ability to increase milk production, help farmers increase their productivity, and capture a slice of the mushrooming appetite for quality dairy products in China, Indonesia and other Southeast Asian nations.
A recent Rabobank report on Asia’s growing demand for «white rivers of milk» estimates China’s reliance on dairy imports is about 20 per cent of total milk demand, with further growth rates tipped of 20-30 per cent a year.
Rabobank’s director of dairy research Asia, Hayley Moynihan, says the rush for «quality» Australian milk products, especially infant and toddler milk formula and supplements, directly followed the 2008 melamine milk scandal in China, when locally produced milk and infant formula tainted with the plastic melamine had harmed 300,000 people and killed dozens of babies.
Dairy Australia industry analyst John Droppert points to the ban in Hong Kong on mainland Chinese buying or taking more than two tins of Australian and New Zealand infant formula back across the border as evidence of the Asian Century in action in the global dairy market.
He says many Australians, including farmers, have not yet realised the Asian food boom has already arrived and is directly affecting world demand for Australian food exports and Australian-owned food companies such as WCB.
«We hear a lot about the short-term struggles dairy farmers are facing, but what you are now seeing in this bidding war (for WCB) is people putting their money on the longer-term future of the industry and what Australia can offer the rest of the world, especially these growth markets in Asia,» Droppert says.
«There are only about 10 sizeable dairy processors out there and Warrnambool is in the top tier; it has exactly what these buyers, especially overseas ones, are looking for, which is a production base and the capacity to obtain the milk from guaranteed farmer-suppliers in the first place.
«You can build a dairy factory anywhere in the world but what you can’t buy anywhere is the ability to produce high-quality milk at relatively low cost, and southern Australia, with its rainfall and climate, especially in Victoria and Tasmania, is one of the best places in the world, along with New Zealand and some parts of Europe, to do that.
«That’s why you are seeing these bids go so high; it’s hard to put a value on gaining a foothold into Asia and an established milk production base like WCB has at the same time.»
Saputo – the biggest fresh milk processor and cheese maker in Canada, and with significant market share in the US and Argentina – has 53 dairy and milk-processing factories in North and South America, with 12,000 employees.
But expansion into booming Asia import markets has remained out of reach until now.
Saputo believes Australian dairy farmers – and milk-processing companies such as WCB that export more than half their 143,000-tonne annual output of cheese, butter, skim milk powder, infant formula and whey products – are uniquely and fortuitously placed to ride the Asian food boom wave as 3.2 billion Asians enter the ranks of the affluent middle class by 2030.
Addressing yesterday’s Timboon meeting, Saputo tacitly agreed with analysts – and WCB’s own independent report from KPMG that nominated any bid between $6.96 and $7.49 a share as fair and reasonable – that with an offer of $8 a share valuing the company at $450m, the company’s assets were over-valued. But he said the acquisition was almost priceless to his company.
It was a discussion that reassured Cooriemungle dairy farmer Wim Kampschoer, who attended yesterday’s meeting with Saputo and has previously worried that too high a price paid for WCB would result in low milk prices for local farmers in later years.
«He told us that Saputo’s strategy is to invest and grow assets here and to expand the business, not to take money and profits out of the country back to Canada,» Kampschoer says.
«He said this was not a predatory bid but a long-term investment by Saputo so it can grow internationally and launch itself into Southeast Asia; he said the final price paid (for the company) would have no bearing on what he says are exciting prospects for us to be paid top milk prices in future.»
Nearby dairy farmer Russell White, 50, is also watching the bidding war for WCB play out; sitting on about 50,000 shares and wondering which bidder will fund his future retirement best.
But he also has no regrets about selling a parcel of 20,000 shares in April for about $3.50 each, long before the buying frenzy broke out, because, like many local farmers before him, he used his treasured shares – first bought in 2002 for 25c each when all milk suppliers were offered company scrip – as a cash buffer against disaster.
It was that sale that got the banks off his back and saved his then drought-stricken farm, with no grass or feed, from tragedy. Cash in hand meant White could afford to buy hay to keep his 200 cows healthy and his milk flow good when some local farmers were in crisis. Overloaded with debt and lacking money for hay, dairy cows were dying of starvation in some grass-bare paddocks north of Simpson.
«I didn’t want to sell the shares but it stopped the bank knocking on the door and fed the cows,» White says.
«As a farmer, you do whatever you have to for your cows because without them you’ve got no milk and have got nothing.
«Shares, while it’s fun to watch what’s happening now, don’t matter like that in the end.»
Source: The Australian