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Saputo's main Australian rival ends battle, claims it couldn't compete fairly

MONTREAL - Australia's largest dairy producer has called off its battle for control of Warrnambool Cheese and Butter, claiming it wasn't able to compete fairly against the winning bidder, Montreal-based Saputo.

Murray Goulburn Co-Operative said its opportunity to gain an even larger share of the dairy sector was lost when Australia's new federal treasurer and the Foreign Investment Review Board approved Saputo's takeover efforts, long before its own bid could be sanctioned by the country's competition tribunal.

"Murray Goulburn was not able to compete realistically on a level playing field with a competing international bidder for WCB," it said in announcing its decision to withdraw through the Australian Securities Exchange on Thursday.

It expects to receive at least AU$92.8 million cash from the sale of its Warrnambool shares — roughly 17.7 per cent of the total — for an AU$51 million profit before tax and costs.

Murray Goulburn said its decision to accept the Canadian company's offer will push Saputo's majority above the 75 per cent threshold — although that hasn't been confirmed by Saputo as yet.

At the 75 per cent majority level, Saputo (TSX:SAP) will pay AU$9.40 per WCB share but could pay as much as AU$9.60 each if it gets at least 90 per cent of the total.

According to a regulatory filing on Thursday by Saputo, it had 57.7 per cent of Warrnambool's shares as of Jan. 22 — giving it a majority that guaranteed it would pay at least AU$9.20 per share. Its offer expires Feb. 4.

In addition to selling its shares, Murray Goulburn said it has withdrawn its application to the competition tribunal, which had slated hearings to begin Feb. 10.

Managing director Gary Helou said it had a "compelling case" to win competition tribunal approval but said the company chose to sell once Saputo secured a majority of Warrnambool shares.

"We have an obligation to our co-operative shareholders to maximize the financial outcome and focus management time on growing a strong and globally competitive co-operative," he said.

Helou added that the co-operative's efforts drove a "genuine auction" that benefited all Warrnambool shareholders.

Murray Goulburn was the second bidder to ultimately throw in the towel. Bega Cheese, which launched the battle to take over Australia's oldest dairy, sold its stake after letting its bid lapse.

Saputo sees Warrnambool as a strategic acquisition that provides it with an entry into the important Asia-Pacific region and capitalize on growing global demand for dairy solids. The demand for milk powder used in baby formula, for example, has grown by 25 per cent annually since 2010.

The deal may not be the last for Saputo, which may seek to add other Australian dairies. However, it would likely again face its bidding war opponents as Murray Goulburn has vowed to consolidate the deeply fragmented Australian dairy market, which it leads with a 31 per cent market share.

A Saputo investor said the company paid a high price to get Warrnambool, but did what was required to enter the Australian market.

"It will be hard to get a great return on the asset over the next few years," said John Stephenson, senior vice-president and portfolio manager of First Asset Management. However, my expectation is that four or five years from now this transaction would look quite a bit better."

Stephenson said he believes Saputo will expand Warrnambool's existing production before making additional acquisitions.

"There are other assets in Australia that are attractive but they are relatively small and less attractive to them."

Irene Nattel of RBC Capital Markets said she wasn't surprised that Saputo's rivals would cash in by selling their shares to Saputo.

"Barring any unforeseen development, the question is at what level of ownership and at what price Saputo will find itself on Feb. 4," she wrote in a report.

Kirin Holdings, which owns about 10 per cent of WCB through its Lion unit, remains the last major holdout. Australian media have reported that Kirin has "no current intention" to sell and "looks forward to continuing to strengthen its relationship with WCB."

On the Toronto Stock Exchange, Saputo's shares closed at $52.76, up seven cents in Thursday trading.

Follow @RossMarowits on Twitter

The Canadian Press


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