THE extraordinary battle for Warrnambool Cheese and Butter went white hot last week.
The increased frenzy was sparked by approval from Treasurer Joe Hockey on Tuesday under the foreign takeover rules of the offer from one of the three suitors, the giant Canadian Saputo dairy group.
This forced the second suitor, the local Murray Goulburn dairy co-operative, to announce on Wednesday that it would top the Saputo offer by a full $ 1, lifting its bid from $ 7.50 to $ 9 for each WCB share.
It was a desperate move by MG to keep the auction going, as its bid requires approval from the Competition Tribunal, and that will take at least six months.
By topping Saputo by so much, MG was hoping to prevent it locking up control of WCB well before that. But then on Thursday, the third suitor, the much smaller Bega Cheese, threw its own curve ball into the game.
Bega lifted its cash and shares bid, but to a level which, while higher on paper than Saputo’s $ 8, was actually lower than MG’s promised $ 9.
The new element Bega introduced was to make its bid unconditional. That meant any WCB shareholders who accepted would be paid immediately and Bega would keep the shares whatever else happened.
Then, on Friday evening, Saputo delivered a blockbuster. It raised its bid to match MG’s $ 9 and, with Hockey’s approval in its pocket, it also went unconditional, to match Bega’s play.
In most takeovers, that would be game, set and match to the Canadians. It’s in a race to 50.1 per cent and control; and with the top offer at a very – extraordinarily – high price, and being unconditional, Saputo would seem to look like Fiorente at the 100m mark at Flemington on Cup Day.
But this is no ordinary takeover and no ordinary race – Warrnambool has become the most prized real estate in Australian dairy.
It’s clearly important for the Canadians to break into the Australian market and, through us, grow into Asia.
It’s literally, corporate life or death for Bega. WCB is that company’s last chance to grow out of its narrow NSW south coast base, and if it fails, Bega will almost certainly become the next target.
While WCB is fundamental for MG to seize the major integration and synergy benefits to grow into a major export-focused global major like New Zealand’s Fonterra.
Critically, Saputo starts with no shares in WCB. Both MG and Bega have significant stakes – MG has 17 per cent and Bega a little more than 18 per cent.
To add yet a further complication, the giant Japanese-owned Lion dairy group – which has a business relationship with WCB – has snapped up a 10 per cent stake in the target.
Those three stakes add to over 45 per cent, almost enough to deny Saputo 50.1 per cent. And indeed, there’d be nothing to stop Lion going to 15 per cent – taking the three to more than 50 per cent – if it wanted.
Normally in these circumstances, Bega and MG would concede defeat, selling out to Saputo. But the stakes are so high, they could well decide to hang on. To be prepared to stay as minority shareholders in a Saputo-controlled WCB.
This might make Bega pivotal. It would be most tempted to sell. It could now get nearly $ 100 million for its stake – very big bucks for the small company. But it could also make itself more valuable by NOT selling. A battle could erupt for Bega. You buy Bega, you also buy its 18 per cent stake in WCB.
MG could launch a bid for Bega, conditional on it not selling, and conditional on getting competition approval. That could take it to 35 per cent and a voice in WCB’s future.
But that could bring Fonterra into the game, as it recently snapped up a 6 per cent stake in Bega, with which it has a business relationship.
WCB is a relatively small company. But the future of the entire Australian dairy industry is now pivoting on it, just as the industry has the chance of embarking on a major growth future into Asia, with milk powder becoming dairy’s iron ore.
It’s possible that WCB could emerge owned by a collection of industry shareholders – somewhat uneasy partners, but partners nevertheless.
Just like Virgin Airlines, which is 23 per cent owned by Air NZ, with Etihad and Singapore Airlines also having 20 per cent stakes. And with the original founder, Sir Richard Branson’s Virgin Group playing the role of Lion with a further 10 per cent.
And for much the same reason: Virgin is the last available real estate in the domestic airline industry, with Qantas now tied to Emirates.
So far, Virgin has been able to work with all three foreign airlines, while also running and growing its own business – domestic and international – quite separately from them.
It has worked both ways, essentially because Qantas-Emirates is the dominant player in the international space. The trio has plenty of room to grow through Virgin without getting in each
It’s also great for Virgin as the trio – and Branson – are a ready source of capital.
It will be interesting to see whether WCB ends up with a similar shareholding mix.