AUSTRALIA'S last big dairy co-operative, Murray Goulburn, is again talking up its spurned $270 million takeover proposal for Australia's last listed dairy group, Warrnambool Cheese and Butter Factory. But it is going to take more than words to get the bid over the line.
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Both Murray Goulburn and the big Montreal-based Canadian dairy group, Saputo, want to buy Warrnambool, but Warrnambool's board shows no sign of allowing an auction to develop.
Warrnambool was approached by Saputo last October about a takeover at an undisclosed price below $4 a share. In December, Saputo upped its offer to $4, and a few days later Murray Goulburn arrived with a $3.80 a share cash takeover proposal of its own.
The Melbourne-based co-operative increased its offer for a scheme merger to $4.35 cash a share earlier this month, but Warrnambool rejected it again, as too cheap, potentially too unpopular with dairy farmers who are also Warrnambool milk suppliers, and too conditional.
Last year's opening offers from Saputo and Murray Goulburn were partly opportunistic, coming as they did after a fall in milk commodity prices during the global crisis that pushed Warrnambool to a loss of $20 million in the year to June 2009.
The group's shares fell from $5.37 in the final quarter of 2007 to a mid-2009 low of just $1.72, and are back up to $4 in the wake of the offers, and a recovery in milk product prices that allowed Warrnambool to post a modest $8.9 million profit in the December 2009 half-year.
The bid and re-bid by both the Canadians and Murray Goulburn have elevated the offer to a multiple of 23 times expected 2009-2010 earnings. That is difficult for any company to ignore, and Warrnambool's board is citing several reasons for doing so.
It says, for example, that Murray Goulburn's $4.35-a-share offer ignores savings that would flow from the merging of overlapping operations - savings that are not available to the Canadian group that has offered only 35 cents a share less. Warrnambool camp members assert that the savings are worth about $20 million a year, or at least $2 a share.
The takeover synergies argument is, of course, somewhat weakened by the fact that Warrnambool is suppressing a takeover auction that could drive the offers higher. But the board is also, in effect, arguing that Warrnambool's fate is controlled by a group of dairy farmer shareholders who simply don't want to see Warrnambool's life as an independent buyer ended - and in particular, don't want it ended by Murray Goulburn.
Warrnambool's constitution restricted shareholdings in the company to a maximum of 5 per cent until 2008, when the group's shareholders agreed to allow the limit to increase to 10 per cent in May 2009, 15 per cent in May this year, and to disappear entirely in May 2011. The limit needs to be scrapped by shareholders early to allow a takeover to occur now, and the board's argument is that the vote cannot succeed.
The opposition to Murray Goulburn is coming from dairy farmers who supply milk to Warrnambool and currently control between 30 per cent and 40 per cent of the Warrnambool register. For them, Warrnambool is a third buying force in their market, alongside New Zealand's Fonterra group and Murray Goulburn.
A takeover by a new foreign entrant - Saputo for example, which is closely monitoring the situation - would still leave three milk buyers in the market. A Murray Goulburn takeover would reduce the number of buyers to two - and Murray Goulburn is the de facto price setter in the Australian milk market: other producers including Warrnambool cannot pay less than the co-op, and usually pay a little bit more to secure their supplies.
Murray Goulburn argues that it is the national price-setting force that maximises returns for dairy farmers around the country, but the situation for western Victorian dairy farmers is more personal: the milk price they receive is the fundamental driver of the value of their dairy farms, and large numbers of them do seem to believe that the price they receive from Murray Goulburn will be lower in the long term than the one they have been receiving from Warrnambool.
Murray Goulburn chairman Grant Davies said yesterday that the co-op was confident there was support for the merger, and pointed out that if 40 per cent of Warrnambool's register is controlled by dairy farmer-suppliers 60 per cent is not. At least half the register is controlled by farmers who either supply Warrnambool or once did, however, and one well-connected one I spoke to asserted there would be defections if Murray Goulburn took over.
Warrnambool would be an important addition for Murray Goulburn because its dairy farms in western Victoria have not been as affected by poor rains as Murray Goulburn's existing catchments to the north and east of the state. The co-op's milk volumes have declined at rate of 1.4 per cent a year in the past five years while Warrnambool's have risen by 4 per cent a year.
But it is going to take a bigger price to win over Warrnambool's board and its dairy farmer shareholders - too big, perhaps, for Murray Goulburn or Saputo to justify.
