Agriculture, Food Companies in Demand Down Under

Agriculture, Food Companies in Demand Down Under

Deal Volumes, Share Prices on the Rise

GILLIAN TAN

Oct. 29, 2013 7:57 a.m. ET

SYDNEY—Australian and New Zealand agricultural and food companies, well-positioned to feed an increasingly affluent Asia, are finding themselves on the shopping lists of investors both big and small. Consider the battle for Australia’s oldest dairy company, Warrnambool Cheese & Butter Factory Co. WCB.AU -5.11% Last week, Saputo Inc., SAP.T -0.14% Canada’s largest dairy processor, sweetened its bid for the company to 448 million Australian dollars (US$426 million), topping offers from two Australian bidders— Bega Cheese Ltd.BGA.AU +4.80% and Murray Goulburn Co-operative Co.Sydney-based Lion Co., a unit of Japan’sKirin Holdings Co. 2503.TO -0.28% , joined the action on Tuesday, buying a 9.99% stake in Warrnambool at a premium to Saputo’s offer. A person familiar with Lion’s thinking said the company doesn’t plan to make an offer for Warrnambool, but wanted to preserve its relationship with Warrnambool, an important supplier.

Saputo has said buying Warrnambool would enable it ship to Asia from Australia rather than from Argentina.

Of course, Saputo isn’t the only company to have done that particular math. In fact, agricultural assets Down Under are attracting more attention than ever before as Asia’s growing demand for food, particularly high-quality products, becomes more apparent, said Sam Prentice, head of consumer and retail at advisory Rothschild Australia.

“For products in which Australia has a comparative advantage like grains, animal protein and dairy, it is increasingly seen as a market in which international players want to have a presence,” he said.

Rothschild Australia is advising Saputo on its bid for Warrnambool.

So far this year the value of agribusiness mergers and acquisitions in Australasia—Australia, New Zealand and the Pacific Islands—has totaled US$1.37 billion, according to data provider Dealogic.

That’s the second-most on record, according to Dealogic, behind only the US$3.17 billion seen in 2010. But this year’s figure doesn’t include Archer Daniels Midland‘s ADM +2.23% $3 billion takeover of GrainCorp Ltd. GNC.AU -0.97% , Australia’s largest listed grain handler, in a deal that was reached in April, because ADM’s first offer was made last year.

Including the ADM-GrainCorp. deal, which is awaiting regulatory approval, 2013 has been a record year for agriculture M&A Down Under.

Investor appetite has also been reflected in the share prices of listed companies. Since listing in July, shares in New Zealand’s Synlait Milk Ltd. SML.NZ 0.00% —backed by China’s Bright Dairy & Food Co. 600597.SH +4.09% —have jumped more than 67%, boosting its coffers.

This month, Synlait Milk Managing Director John Penno and a consortium comprising China’s Shanghai Pengxin Group Co. offered 85.7 million New Zealand dollars (US$70.8 million) to acquire dairy company Synlait Farms Ltd., which is unaffiliated with Synlait Milk.

Other listed dairy companies have also enjoyed big gains. Shares in Freedom Foods Group Ltd. FNP.AU 0.00% have more than tripled this year, while those in Warrnambool suitor Bega Cheese have more than doubled.

Desmond Sheehy, co-founder of Duxton Asset Management, said he believes many investors have seen the potential in Australian agriculture and are looking for opportunities to buy in, but notes that “there’s a difference between window shopping and going to the register to pay.”

“As the global population begins to eat better, production needs to become more efficient, so without significant investment into the sector, we’ll head into a crunch,” said Mr. Sheehy, who helps manage around US$620 million in assets.

Around a quarter of Duxton’s assets under management is invested in Australian food-related assets such as apple orchards, cereal production and dairy farms. In New Zealand, Duxton owns a grass-feed operation.

“We see Australia as a key part of our diversified agricultural portfolio–the vast amount of arable land and its small population make it a major exporter,” he said.

David Williams, managing director of Kidder Williams, an Australian corporate adviser that specializes in food and agriculture, said he believes that Asia’s rising wealth and greater focus on food quality will spur more investments.

“I expect more M&A or very large capital flows into existing players in order to build additional infrastructure to support growth in industries like dairy, sugar, horticulture and eventually, beef,” Mr. Williams said.

“Countries like China are moving towards introducing legislation that ensures formula products are canned in the place of manufacture so raw materials aren’t blended with poorer quality ingredients. That’s going to favor large dairy companies within China but also peers in Australia, New Zealand and elsewhere.”