Sitting on farm fence in global bidding war for Warrnambool Cheese & Butter; While big business battles for control of the Warrnambool dairy producer, farmers are undecided.

Sitting on farm fence in global bidding war for Warrnambool Cheese & Butter

While big business battles for control of the Warrnambool dairy producer, farmers are undecided.

November 9, 2013

Jared Lynch


Nick Renyard’s farm is far from the clang and clatter of city traffic and investment bankers’ offices. Bush and bird song line the road to the third-generation dairy farmer’s property nestled in the rolling green hills south of Timboon, in Victoria’s Western District. Mr Renyard’s association with Warrnambool Cheese & Butter is more than just that of a supplier and processor. His father John was director at the company, and Mr Renyard, 39, has owned WCB shares longer than he can remember. ”I’ve had them since I was a little kid,” he said. ”I can’t remember exactly how long I’ve had them but when I got them they were $2 ordinary shares and there were 500.” Almost all of Australia’s main milk processors, including NSW’s Bega Cheese and the country’s biggest milk processor, Murray Goulburn, have entered a global bidding war for WCB, which until recently was little known outside its home base in south-west Victoria.Its head office and factory in Allansford, a hamlet at the end of the Great Ocean Road about 10 kilometres east of Warrnambool, is unassuming.

Its corporate suites, in a two-storey building at the front of the plant, have remained mostly unchanged for the past three decades. The wood-panelled rooms overlook Cheese World, an attraction built during the ”world craze” of the 1980s, dedicated to the company’s history, and cheese tastings.

It has a proud history dating to 1888, but this is not why food companies in Australia and Canada are stalking WCB.

The company is well placed to take advantage of an Asian boom, which is being fuelled by increased affluence and appetites for a more Western diet.

As well as being able to supply the growing demand for basic dairy produce, WCB also produces milk extracts, which are the main elements in health products from baby formula to bone supplements. The extracts are a part of the nutraceutical market, which is set to be worth $80 billion in the Asia-Pacific region by 2017, and WCB is just one of two processors in Australia with the capacity to produce them.

But as the battle to take over Australia’s oldest listed dairy processor intensifies in board rooms from Bega to Quebec, Mr Renyard – speaking from his farm with hands covered in iodine sanitiser from the morning’s milking session – said he remained undecided about which company represented the best fit for Warrnambool.

His main concern is protecting farmers’ milk payments in the long term. That, he said, is more important than any dividend or share price movements in WCB.

Farmers such as Mr Renyard are therefore weighing up maintaining competition within the local dairy industry, by welcoming Canada’s Saputo as another player, or creating a bigger Australian company, with Murray Goulburn or Bega, to increase competitiveness overseas.

”I’m sort of sitting on the fence,” Mr Renyard said. ”I am swayed a little by the argument that, yes, [WCB’s] competition is overseas, we are about 50 per cent export, 50 per cent local. And the local price is driven largely by the international price because of our relationship with New Zealand, and there is such a big exporter there. But I find it hard to discount the local competition angle as well.

”Say, for example, Murray Goulburn took over Warrnambool, we really only have one other major player down here [Fonterra] that we could potentially sell milk to, but they probably have limited capacity to take more milk.”

Murray Goulburn has offered $7.50 cash per share for WCB, compared with Saputo’s $8 cash a share, which is subject to Foreign Investment Review Board approval, and Bega’s $2 cash plus 1.2 of its shares for every WCB share, which values the bid at $7.57.

It is the second time both Murray Goulburn and Saputo have had bites at Warrnambool.

Saputo approached WCB about a takeover in October 2009 at an undisclosed price, but below $4 a share. Two months later, Saputo increased its offer to $4, and a few days later, WCB rival Murray Goulburn arrived with a $3.80-a-share cash takeover proposal. But WCB’s board said both offers were too low.

The offers came after a collapse in international dairy commodity prices and a disastrous joint cheese venture between WCB and National Foods (now called Lion), which weakened the company and led to an exodus of farmers to rival processors. WCB could not afford the $50 million for its 50 per cent stake in the venture, and cut the price of milk it was buying from farmers.

Its $24.5 million net profit from a year earlier curdled into a $19.9 million loss in 2009 as a result.

Former chief executive John McLean was called out of retirement to replace Neil Kearney, and almost Pied Piper-like lured back farmers with his safe hands. When current chief executive David Lord began his tenure in 2010, most of the farmers had returned but some, to this day, have not.

Mr Renyard is concerned a takeover by Murray Goulbourn, which has a 17 per cent stake in Warrnambool, could again put farmers’ milk payments at risk.

He points to their debt levels; ”there have been so many figures thrown around – anywhere from 53 per cent,” he said. ”Murray Goulburn taking on so much more debt should be a concern for everyone because that interest needs to be serviced … well, it would be from farmers’ payments.”

But Murray Goulburn managing director Gary Helou said, as a farmer co-operative, his group was focused on maximising farm-gate returns.

”Through scale, which will come through the combination of Warrnambool and Murray Goulburn, we will deliver a net increase in farm-gate prices from day one, despite the debt people are talking about,” he said. ”We are on a strategy to increase farm-gate prices by $1 per kilogram solids. It’s a huge increase and the Warrnambool acquisition will contribute to that as well as the other modernisation initiatives that we are doing.”

Mr Helou said if Murray Goulburn acquired 100 per cent of WCB its gearing would rise to 52-54 per cent. He said that is less than Fonterra, whose debt level was about 60 per cent when it began its expansion phase.

WCB’s David Lord said the board was ”seriously considering” Murray Goulburn’s offer and that it was at the upper end of the scale in an independent expert report from KPMG. But a week later Saputo trumped MG, increasing its bid from $7 to $8 a share.

But Mr Helou said he is confident Murray Goulburn’s bid will be successful and that it will be approved by the competition regulator, but added the co-operative ”reserved its right to review” the offer in the future.

Mr Renyard warms to Bega’s bid more than Murray Goulburn’s, but said the offer from the NSW dairy company is not high enough because it is dependent on Bega’s share price.

”Bega is not a bad fit with Warrnambool. They only have a small number of suppliers in the region, so it still maintains a competitive situation locally. And it does create another pretty sizeable player with some reasonable horsepower as an exporter. I just don’t think that they can justify the share price out there.

”You only have to look back 12 months and the share price was less than half what it was now. If they are going to $2 plus shares, back in the first place it should have been $2 plus two or three shares.”

Bega bought a 15 per cent stake in WCB in November 2010, in what was promoted as the two companies joining forces to form a ”strategic management group” to identify opportunities in processing, manufacturing and distribution. There was no talk of mergers or takeovers.

Bega steadily increased its holding in WCB to 17 per cent before launching a bid in September this year, in what WCB chief executive Mr Lord described as ”highly opportunistic” and inadequate.

He also hinted an overseas player was interested, but declined to name the company.

Two weeks later, Saputo chief executive and vice-chairman Lino Saputo jnr posed for photographs outside WCB’s factory (overlooking Cheese World’s giant milkshake statues). By his side was Mr Lord, who announced Saputo was the board’s preferred suitor.

Mr Saputo said his company, which has no presence in Australia, has been eyeing WCB for 12 years, recognising that its acquisition is key to its growth plans for the Asia-Pacific region.

He said there will be no rationalisation of staff or redeployment of assets.

”We would see Warrnambool as a platform for growth in Australia and through which to expand into the Asia-Pacific region, working with Warrnambool’s management to capture those opportunities,” he said.

And he is not the only one saying it. Former BHP Billiton boss Marius Kloppers said in August last year that supplying a growing global population with food would be a challenge.

”By our estimation, food will be a material issue for the world over the next decades and potash is our way to play into supplying the world with food,” he said.

Commonwealth Bank’s dairy report released last February said China’s consumption of dairy products was rising rapidly.

”The enormous size of the Chinese population, 1.35 billion people, means growth in per-capita consumption has a big impact on total Chinese demand, and in turn, total global demand,” the report said.

”Since 2010, China has contributed 33 per cent to global fresh milk consumption growth, 36 per cent to global skim milk powder growth and a staggering 80 per cent to whole milk powder growth.”

WCB has already focused on the potentially booming infant formula market in Asia. Under a recent deal with New Zealand’s Tatua Co-operative, WCB is expected to start extracting and processing lactoferrin, which is used in infant formulations, from milk.

The milk extract has been dubbed ”white gold” by some analysts because it is worth about $1000 a kilogram. And that kilogram takes about 100,000 litres of milk to produce.

RBS Morgans analyst Belinda Moore said China in particular is looking to Australian products because of their reputation of being ”clean, lean, green, quality and safe”.

Six babies died and about 54,000 were hospitalised in China in 2008 after a Chinese infant formula was contaminated with melamine, which causes renal and urinary problems, in an attempt to increase its protein content.

”You are seeing very strong demand for our dairy products,” Ms Moore said. ”It’s not about fresh milk. It’s the milk powders which all the babies are drinking. As they consume a more Western-style diet, demand for dairy is going very strong year in year out, and that is expected to continue.

”Their people want to eat from producers such as Australia because of that quality, clean, green image.”

Such is China’s appetite for foreign infant formula that there have been media reports of Chinese students clearing supermarket shelves and ordering huge amounts of the product.

But Ms Moore said the high-tech milk products, which trade at a high margin, are not the only reason a global bidding war has ignited for WCB.

”The thing about Warrnambool is 50-60 per cent of the business is export, so it’s got a very strong export position. That’s what is attractive. That availability.

”It’s also in the best dairying region in the country, which has high rainfall. It is the most efficient dairy producer in the country because it is largely a single plant.”

But PAC Partners agribusiness analyst Paul Jensz said WCB and the successful buyer will still have a long way to go to capitalise on the Asia boom.

He said his valuation for a stand-alone WCB based on discounted cash flow is between $4 and $4.50 a share. At Friday’s close, WCB shares were $8.46.

”We have got this frenzied activity now because there are scarce assets in the space and the next owner will probably hold on to Warrnambool for a significant amount of time. It’s not a private-equity show that’s going to buy it and throw it out in a few years.

”[But] they need to do a lot more with their margins and their brands, their location down there, to get up to $8 a share. It is a big, big ask.”

Adding intrigue to the fight over WCB are two multinationals. The world’s biggest dairy exporter, Fonterra, has bought a 6 per cent stake in Bega, while Japanese-owned food conglomerate Kirin snapped up 10 per cent of WCB through its subsidiary Lion.

Mr Jensz said Fonterra moving on Bega gives the NSW company’s offer more firepower.

”Fonterra investing in Bega rather than Warrnambool shows that Bega is their favoured partner here in Australia.

”If Bega selects to have another look at the investment in Warrnambool, Fonterra is suggesting that it likes the strategy of Bega, it likes the way it does things.”

Bega’s board met on Thursday to discuss whether to make its offer unconditional or increase its bid. It chose to do neither, releasing a short statement to the ASX that it would simply ”continue to consider the matter”.

It is understood Kirin is not looking to take over WCB – rather, it is seeking to protect the viability of its cheese brands Coon and Cracker Barrel.

WCB supplies Lion with its entry-level cheeses. In return, Lion cuts and wraps WCB’s cheeses. It is an agreement aimed to create cost efficiencies in a high-volume, low-value product, which is frequently the target of heavy supermarket discounting.

Kirin is therefore using its stake to gain a seat at the negotiating table to ensure its WCB agreement continues with any new owner.

Mr Jensz said the Kirin block of votes has made the chances of a Saputo offer, which is conditional on 50.1 per cent acceptance, being successful more challenging. Bega, Murray Goulburn and Kirin own 45 per cent of WCB’s stock.

”A full takeover is going to be quite difficult. Someone trying to get 90 per cent-plus, I think, is looking to get a multi-part process. It would need to have had [the support] of at least two of the major players involved to make it work, unless someone came over the top with a massive bid that was clearly superior to all the other bids out there.

”Someone controlling 50 per cent or just over 50 per cent is more practical, and you’d have to say that the Australians have their noses ahead in that game.”

Back at his farm, Mr Renyard is getting ready to wash his hands and go into Timboon to celebrate his mother Heather’s birthday.

The fate of WCB will depend, in part, on the decisions of farmer shareholders. But with institutional shareholders and non-farmer shareholders also in the mix, Mr Renyard is unsure how it will all unfold. He said: ”Some dairy farmers will have a lot more say than others because some dairy farmers have more shares than others. But there are a lot of people who are shareholders and will have a relatively small say.

”I’m not sure how much say that we are really going to have. I’m really sitting on the sidelines, being a spectator – like at the footy.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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