Australian dairy co-operative Murray Goulburn Co-operative Co. Limited (Murray Goulburn) has entered the battle for Victorian-based dairy company Warrnambool Cheese and Butter (WCB) with a $420 million takeover offer.

The Murray Goulburn offer, which proposes to acquire all the WCB shares for $7.50 cash per share, comes after earlier offers from Australian ASX-listed dairy company, Bega Cheese, and Canadian dairy company Saputo, respectively. When the takeover offer from Bega was first announced in September 2013, Australian Food News predicted that an offer from Murray Goulburn could be forthcoming, with industry commentators saying such a takeover could see major changes in the structure of the Australian dairy sector.

Murray Goulburn said its proposal would create one of the largest Australian owned food and beverage businesses and “globally competitive food company 100 per cent controlled by dairy farmers”. It forecasts that annual revenues of such a company would be in excess of $3.2 billion.

“This is an historic opportunity for Murray Goulburn and WCB suppliers and shareholders to create a larger scale, globally competitive Australian dairy food company owned and controlled by Australian dairy farmers,” said Philip Tracy, Murray Goulburn Chairman.

“Importantly, it will retain the primary objectives of a co-operative in maximizing farm-gate returns for farmer owners. It will also support on-farm and industry investment, and it turn grow the Australian dairy industry for the benefit of regional communities,” Mr Tracy said.

Highlights of Murray Goulburn’s offer

• $7.50 cash per WCB share, valuing WCB at $420 million, which represents:
  • 66 per cent premium over the closing price of $4.51 per WCB on ASX on 11 September 2013, the last trading day prior to the announcement of Bega’s offer
  • 7 per cent premium to Saputo’s $7 cash per share offer and 13 per cent premium to the implied value of Bega’s offer, based on the closing price of Bega shares on ASX on 17 October 2013
  • A price above the top end of the Independent Expert’s assessed value range for WCB, dated 12 October 2013
• Fully funded with Murray Goulburn having secured addition debt facilities from its existing financiers National Australia Bank Limited (NAB), Australia and New Zealand Banking Group Limited (ANZ) and Westpac Banking Corporation (WBC).
• Murray Goulburn said the proposal would create a new 100 per cent Australian farmer-controlled dairy food company with over 3,000 supplier shareholders delivering more than 4 billion litres of milk to nine processing sites annually. According to Murray Goulburn, the business would be positioned for “strong growth” in both domestic and international markets, with forecast revenues in financial year 2014 of $3.2 billion, including export sales of $1.4 billion  to over 60 countries.
• Murray Goulburn said its proposal would also “provide an excellent opportunity for WCB suppliers to become supplier shareholders in a globally competitive dairy food company, which will deliver future profits and growth to Australian dairy farmers and their communities”. WCB suppliers who joined the enlarged co-operative would participate directly in the benefits of co-operative ownership, according to Murray Goulburn, including being able to participate in any future changes to Murray Goulburn’s capital structure that may arise as a result of the review that was recently announced to Murray Goulburn suppliers
• Murray Goulburn said its offer was “superior to both Saputo and Bega’s offer in terms of value and benefits delivered to WCB shareholders, rural communities and the Australian dairy sector as a whole”.

Background to the Offer and Murray Goulburn’s intentions

Murray Goulburn said that while it had previously held high level and preliminary discussions with WCB, there had been no engagement with the WCB Board in relation to the current offer, given the various deal protection mechanisms set out as part of the Saputo proposal.

Murray Goulburn said it put forward this offer on a “friendly basis” to WCB and its shareholders, and is seeking a unanimous recommendation from the WCB Board that WCB shareholders accept Murray Goulburn’s offer.

“A combination with WCB is something we have been considering for a long time and we believe is in the best interests of WCB shareholders given the compelling strategic benefits that would be delivered to farmers, the dairy industry and local communities,” said Gary Helou, Murray Goulburn Managing Director.

“We believe the formation of an Australian co-operative controlled by both Murray Goulburn and WCB suppliers provides significant benefits to all stakeholders, keeping profits onshore, maximizing total farm gate returns to farmer shareholders and increasing the capacity for significant investment in the dairy sector and individual communities,” Mr Helou said.

“We believe our proposal is both competitive and financially compelling to WCB shareholders,” Mr Helou said. “However, we also ask WCB shareholders to carefully consider the full picture. Namely, in addition to crystallizing the value of their shares at an attractive price, they have the opportunitie to contribute the formation of a globally competitive Australian dairy food company that will act forthrightly and decisively in the interests of its suppliers and their communities,” Mr Helou said.

As part of the offer, should Murray Goulburn’s bid become successful and it acquires 100 per cent ownership of WCB, Murray Goulburn intends to seek shareholder approval to rename the combined business ‘Murray Goulburn Warrnambool’ to reflect the view that the transaction would represent a merger of the two companies.

Offer conditions

Murray Goulburn said its offer is conditional on, among other things:

• No objection by the Australian Competition and Consumer Commission (ACCC) or granting of authorisation by the Australian Competition Tribunal in relation to the proposed transaction
• Murray Goulburn having a relevant interest in greater than 50 per cent of WCB by close of the offer
• No material new acquisitions, disposals or other commitments by WCB beyond certain financial thresholds
• No material adverse change of prescribed occurrence events occurring with respect to WCB

Murray Goulburn expects to dispatch its Bidder’s Statement containing detailed information relevant to the offer to all WCB shareholders by mid to late November 2013.

WCB has not yet made a formal response to Murray Goulburn’s offer.

Lazard is acting as financial adviser to Murray Goulburn and Herbert Smith Freehills is acting as legal adviser.

Do further dairy processing bidding battle-lines lie ahead?

Speculation is mounting that Bega will bid again. The question to be asked is, even if Murray Goulburn were to end up as the winner for WCB, whether Murray Goulburn and Fonterra would end up in a bigger bidding war for the publicly-listed Bega. This may depend on whether Bega makes another bid, and consideration of the effect such a bid would have on Bega’s own share price. If a bid by Bega pushes up the price for WCB, one consequence could be a more valuable Bega as Bega has a large pre-existing shareholding in WCB.

Fonterra, which has strong commercial supply relationships with Bega is unlikely to stand idly by in any play for WCB or Bega. Murray Goulburn currently owns a 16 per cent share of WCB. Australian Food News reported in September 2013 that a share swap of Bega shares for WCB shares under the terms of its bid for WCB would therefore also result in the increase of Murray Goulburn’s stake in Bega. This would not be welcomed by Fonterra.