Bloomberg News

China Dairy Demand Drives Warrnambool Bids Down Under: Real M&A

October 14, 2013

Milk Powder

China, the world’s most populous nation, is setting new records for milk-powder imports. Photographer: Nelson Ching/Bloomberg

The race to sate Asia’s increasing appetite for dairy foods has made even the worst-performing producer in the region into the target of a bidding war.

Saputo Inc. (SAP), Canada’s largest dairy processor, agreed to pay $372 million for Warrnambool Cheese & Butter Factory Co. (WCB), topping a bid from Bega Cheese Ltd. (BGA) Warrnambool, which exports most of its produce to nations including China and Japan, is trading above Saputo’s Oct. 8 offer of A$7 a share. That shows some investors expect a higher proposal for Australia’s oldest dairy producer, said Canaccord Genuity Group Inc.

After the slowest profit growth of any Asian peer in the past five years, the 125-year-old company is projected to almost triple earnings this year, according to data compiled by Bloomberg, amid a surge in milk powder prices and record Chinese demand. Bega, Warrnambool’s local rival and its largest shareholder (WCB:US), may be able to raise its bid by squeezing out more cost savings, said RBS Morgans Ltd. Bega needs to boost its offer to A$7.50 a share to win over Warrnambool investors, Canaccord said.

“Dairy, in particular, is benefiting from increased Asian demand,” Stephen Scott, head of research at Ord Minnett Group Ltd. in Sydney, said in a phone interview. “There’s not a lot in the listed space left once Warrnambool goes.”

Warrnambool, which supplies milk to make Philadelphia cream cheese, is named after the home town of its founders in the state of Victoria. Warrnambool now relies on exports for most of its sales and last year made 143,000 metric tons of dairy produce including cheese, milk powder and infant-formula ingredients.

‘Dramatic Improvement’

Even after posting its lowest profit since 2009, Warrnambool is attracting bids just as the dairy-exports cycle emerges from a trough, Chief Executive Officer David Lord said in a phone interview. Poor weather in the world’s main milk-producing regions has dented supply, driving up prices, he said.

“We’re seeing a dramatic improvement in market conditions,” he said. “We’re seeing a rise in demand out of China. The difference between what they can produce for themselves and what they need is becoming wider.”

Lord said it was “possible” that Warrnambool’s stock price reflected investors’ expectations of a higher bid.

China, the world’s most populous nation, is setting new records for milk-powder imports, and demand for produce in India is outstripping local production, Warrnambool said in an Oct. 9 filing. This year, the price of exported milk powder will surge 33 percent, butter will rise 16 percent and cheese will climb 12 percent, the company said.

Profit Jump

Warrnambool’s net income in the 12 months ending June 2014 is forecast to rise to A$20 million ($19 million) from A$7.49 million, according to analysts’ estimates compiled by Bloomberg.

Southeast Asia’s six-largest economies -- Indonesia, Thailand, Malaysia, Singapore, the Philippines and Vietnam -- are also unable to produce enough dairy goods to meet local demand, Rabobank, which specializes in agricultural research, said in a July report. Milk consumption will jump 27 percent between 2012 and 2020 to 14 billion liters in those nations, Rabobank said.

“Saputo in North America can see the growth in Asia,” Mark Topy, an analyst at Canaccord in Melbourne, said in a phone interview. “Australia or New Zealand is the obvious place to be.”

Treasure Cave

A family-controlled business, Saputo plans to use Warrnambool to spearhead sales in Asia. The Australian company would be “the main platform” to tap demand in the Asia Pacific region, Saputo said in an Oct. 8 statement. Saputo also said it plans to invest in Warrnambool’s domestic operations to increase capacity.

Montreal-based Saputo, maker of Frigo and Treasure Cave cheeses, offered A$7 a share in cash, valuing Warrnambool at about A$392 million. The proposal was approved by Warrnambool’s board and beat a stock-and-cash bid from Bega that was valued at A$5.78 a share when it was announced Sept. 12.

Bega rose 0.3 percent to A$3.83 at the close in Sydney, extending its gain since it offered to buy Warrnambool to 22 percent and swelling the value of its bid to A$6.60 a share. Warrnambool, maker of Sungold milk, fell 0.6 percent to A$7.23.

Bega, based in the New South Wales town of the same name, owns about 18 percent of Warrnambool. Saputo’s market value of C$10 billion ($9.7 billion) is more than 17 times larger than Bega’s.

Higher Bid

Saputo’s proposal, in addition to cash, offers Warrnambool investors as much as 56 cents in tax credits for each of their shares. Eligibility depends on a shareholder’s own tax liability.

Even accounting for the potential credits, Warrnambool’s share price reflects a “mild expectation” of a higher offer, said Canaccord’s Topy.

Bega “could increase its bid quite significantly,” Belinda Moore, an analyst at RBS Morgans in Brisbane, said in an e-mail. According to Moore, Bega may be able to double its estimated cost savings from the takeover to A$15 million.

Bega has “no present intention” to raise its bid, though “reserves the right to do so,” the company said in an Oct. 11 filing.

Sandy Vassiadis, a spokeswoman for Saputo, echoed that sentiment in an e-mailed response to questions, saying the company “has no intention to make changes to the offer, but we maintain the right to do so.”

Cheap Production

In addition to their proximity to Asia, Australian dairy producers are attractive targets because the country’s mild winters reduce feeding costs for dairy herds, said Scott at Ord Minnett.

“We have a bit of advantage in producing dairy effectively and cheaply,” Scott said.

For the bidders, those attributes have outweighed Warrnambool’s recent track record. No dairy producer in Asia with a market value of more than $100 million has reported worse sales and profit growth in the past five years, according to data compiled by Bloomberg.

The company’s compound revenue growth rate in the period was almost zero, while profit fell 21 percent on that basis, the data show.

Saputo, as a foreign buyer, would also have to overcome potential regulatory hurdles. Some farmers oppose Decatur, Illinois-based Archer-Daniels-Midland Co. (ADM:US)’s planned A$2.2 billion purchase of Australian crop handler GrainCorp Ltd. (GNC) The deal is being evaluated by Australia’s Foreign Investment Review Board, the same body from which Saputo will need approval.

Ripe Targets

Saputo’s proposal is also dependent on investors holding more than 50 percent of the shares selling. Bega and Murray Goulburn Co-operative Co., an Australian dairy producer whose own bid for Warrnambool was rejected in 2010, own about 35 percent of the stock. Murray Goulburn said Oct. 8 that it will “take time to consider its options,” and a representative for the company declined to comment further.

Demand from Asia’s expanding economies means Australian producers will remain in buyers’ sights, said Neil Pathak, a mergers and acquisition lawyer with Gilbert & Tobin in Melbourne.

“They are going to have a great demand for food,” he said. “We are ripe for foreigners looking to buy good agribusinesses.”

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; David Stringer in Melbourne at dstringer3@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net


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