The Australian Competition and Consumer Commission is giving the dairy industry a week to comment on Saputo’s plans to sell the Koroit milk factory as soon as it takes over Murray Goulburn’s processing assets.
After failing to convince the ACCC its ownership of MG’s Koroit plant would not be detrimental to farmgate milk competition in Victoria’s Western District, Saputo Inc has agreed to cull the site from the $1.3 billion portfolio it buys from the financially troubled dairy co-operative.
The Canadian giant already owns Australia’s biggest dairy processing plant, the Warrnambool Cheese and Butter factory, at nearby Allansford.
MG’s farmer shareholders vote on April 5 on whether to follow their board recommendation to accept Saputo’s offer for the co-op’s seven factories and related assets and liabilities, including the powerful Devondale brand.
MG plans to distribute about two-thirds of the $1.31b sale proceeds to its unit trust shareholders, amounting to 80 cents for each share.
Further payments are possible depending on legal action still hanging over the co-operative after its 2016 farmgate milk payment collapse and subsequent share price free-fall.
About $114 million in sale proceeds will also be made in milk payments to MG suppliers, including step-up payments on current farmgate milk prices.
I think there was some expectation the farmgate milk price would be a competition issue
Two weeks ago the ACCC flagged it would not approve MG’s asset clearance sale to Saputo if both Koroit and WCB plants were to become part of the same company.
The two plants are about 27 kilometres apart and take about 75 per cent of the milk produced in south western Victoria and the border regions of South Australia.
Saputo has now promised to seek the ACCC’s approval before finalising any deal to on-sell Koroit to another buyer.
The competition watchdog says it has not yet agreed to Saputo’s Koroit sell-off plan because it wants market feedback about the idea by March 22 to help it decide.
“The gist of the proposal being considered by the ACCC is Saputo will be legally bound to dispose of Koroit, and existing farmer supply and payment arrangements with the factory will remain,” said ACCC agricultural commissioner, Mick Keogh.
No potential buyers have been flagged, but given the ACCC’s tough stance on maintaining farmgate milk price competition between processors in the dairying region between Melbourne and the South Australian border, it is clear New Zealand’s Fonterra will not be on the shortlist.
Fonterra not in the race
Fonterra already owns the Warrnambool district’s third significant milk plant at Dennington, just 15kms west of WCB’s site, and another at Cobden, 45km to the north.
“The idea is not to reduce competition from three players to two – it would be inconsistent to block Saputo’s ownership of Koroit and then turn around and accept Fonterra,” Mr Keogh said.
Other overseas dairy players are, however, likely to be considered as potential buyers for Koroit, a significant milk plant in the heart of Australia’s most productive dairy country.
China’s Yili Industrial Group from Inner Mongolia, the French-owned Parmalat and Lactalis companies and Singaporean-owned Goodman Fielder group were among previous offshore contenders for MG’s assets before Saputo got the green light.
A host of domestic players, including Bega Cheese, are also likely candidates.
“We’ve had no indication as to who may be a potential buyer, although if overseas companies are involved the Foreign Investment Review Board will seek an ACCC opinion on competition issues before making its recommendation to the Treasurer,” Mr Keogh said.
Koroit decision no surprise
Meanwhile, he said despite both Saputo and MG earlier trying to convince the regulator there were no competition issues likely to emerge if Koroit remained part of Saputo’s empire, “neither party seemed too surprised” by the ACCC suggesting the plant be divested to another buyer.
“I think there was some expectation the farmgate milk price would be a competition issue – they moved pretty swiftly to find an alternative once concerns were raised,” he said.
“We’ve certainly had no indication from either company that divesting Koroit will delay the MG asset sale or create any of the industry uncertainty some suggested might happen if the whole deal didn’t happen as originally proposed.”
Co-op can’t survive
However, the hopes of other MG suppliers for an alternative to selling all the co-op’s assets, or at least for it to remain an active farmer-owned business, were quashed by independent experts this week.
Advisory firm Grant Samuel told shareholders Saputo’s total asset takeover was still the best deal for suppliers and listed unit holders.
"A stand-alone strategy that aimed to preserve an independent MG would involve unacceptable risks," Grant Samuel’s report said.
‘‘There would be a real prospect of further milk losses taking MG past a tipping point that would precipitate loss of financier support and wholesale destruction of equity value.’’
MG chairman, John Spark, said investors faced the prospect of “substantial loss of value in the near term and risk the viability of the business in the medium term” unless they could inject a substantial amount of fresh cash into the business.
“I acknowledged some disappointment among many of our shareholders with the commercial position MG is currently in,” he said.
Since the 2016 farmgate price crash MG’s milk receivals have halved, putting it under more financial stress as it faces big debt costs incurred in a bold expansion of export and domestic production prior to its partial stock market listing in 2015, and after the $500m capital injection.