IT IS almost time for investors to sit down and have a nice glass of iced milk – this dairy bidding war is running way too hot.
Warrnambool Cheese and Butter shares surged past $8 yesterday, double what they were fetching in July and a fairly heroic price even accepting the company’s upgraded profit outlook of between $47 million to $52 million for the 2014.
At that price it is running at 2.6 times the average price earnings ratio of Australia’s biggest 50 companies and the dividend yield has slipped below 2 per cent.
Of course, there is no secret about why Warrnambool shares are on fire, with no less than three takeover suitors in the form of locals Bega and Murray Goulburn plus Canada’s Saputo still in the game and plenty of speculation that other players such as New Zealand’s Fonterra might join in the action.
And the battle is about much more than a straight value for money transaction – this is a fight for a strategic asset that will be hard to repeat so to some extent the normal valuations will always be left behind in the heat of battle.
The problem here is that this battle looks like being quite protracted, given the fairly convoluted range of regulatory and competition issues that surround most of the bidders.
Murray Goulburn is seeking clearance from the Australian Competition Tribunal which could well take place next year – assuming it is granted, of course.
Saputo needs a green light from the Foreign Investment Review Board which could also move into next year, leaving Bega as the only player with a clear early run at the target.
Bega has also been a beneficiary of dairy enthusiasm on the share market with its stock being lifted 48 per cent in a couple of months which yesterday boosted the value of its combined shares and cash bid above the Saputo offer but still behind Murray Goulburn’s $420 million cash offer – which itself is still behind Warrnambool’s boom-time market capitalisation of $455 million.
Assuming no other suitors arrive – which may not be the case – Warrnambool’s actual business faces three very different futures depending on which of the current bidders gets across the line.
Bega perhaps makes the most domestic sense as an acquirer, with the ability to offer investors continued exposure through a local share market listing plus significant synergies in merging its dairy operations.
Murray Goulburn would also enjoy some operational synergies but as a co-operative it offers a distinctly different future in which dairy farmers themselves have a bigger say in the company with milk prices and branding being key drivers against the relentless bulk commodification of milk and cheese by the big supermarket chains Coles and Woolworths.
The success of New Zealand co-op Fonterra in becoming a major international player shows that this structure can certainly thrive in the modern age, albeit from a base in the much healthier and faster growing New Zealand dairy market compared to the more lacklustre Australian dairy scene.
Saputo, like the other players, has its eye firmly on the big prize of becoming a supplier to the fast growing Asian dairy market, with the ability to bulk up Warrnambool’s exports and grow it organically within Australia.
All three future visions have their attractions and disadvantages but this is a is one battle that is unlikely to be finished quickly and may yet be won by another interloper.
Search for a star
DAVID Jones desperately needs a star retailer at the helm after Paul Zahra’s surprise decision to leave due to personal reasons.
While Mr Zahra won’t be leaving right away, allowing the board some time to find a replacement, they won’t want to dally too long given that the upmarket retailer hasn’t exactly been setting the world on fire in recent years.
Mr Zahra’s reign started in a frenzy of public attention in June 2010 when he replaced Mark McInnes who left after harassment allegations were made against him.
Since then Mr McInnes has once again shown his retailing flair after being picked up to run Solomon Lew’s many fashion retailing chains.
Back at David Jones Mr Zahra has made some significant progress in certain areas, notably by upgrading DJs’ technology and online offerings, developing plans to extract value by selling off apartment air rights for its Sydney and Melbourne stores, improving inventory controls, bringing in Dick Smith to manage its loss-making electronics division and developing new store layouts that made a point of displaying high-margin products.
However, the cards were always stacked against Mr Zahra emerging as a DJs legend, with poor consumer confidence, the rise of online shopping and cutthroat retail competition all conspiring to depress David Jones’ profits and share price during his reign.
Ironically, conditions are improving for the incoming chief executive with rising share and property markets traditionally being a solid indicator of a sales upturn for upmarket retailers such as David Jones.
Whether this established wisdom will hold true in the new post-GFC world order remains to be seen but at least Mr Zahra has given his replacement a reasonable chance by negotiating «harmonised» wholesale prices with overseas fashion label suppliers to even up the online trading environment a little.
He has also probably held the line in the battle of the brands with Myer, giving the new incumbent a reasonable base from which to ride hopefully improving retail conditions.
But there is little doubt that the DJs board will be looking for a retail superstar to take over from here, with an international search now underway.
There are just as many cautionary tales about picking up even well credentialled overseas retailers to lead Australian businesses as there are successes but at this stage of its tentative comeback David Jones really can’t afford a mistake, which might tend to favour a local hire.
Source: Herald Sun