Bega bids for Warrnambool

Bega Cheese (ASX:BGA) has made a $319 million bid for Warrnambool Butter & Cheese Factory (ASX:WCB), to create Australia’s largest listed dairy company with significant market presence.

Bega is offering Warrnambool shareholders 1.2 Bega shares and $2 cash for each Warrnambool share – valuing the shares at around $5.78, a premium of around 28% over the last closing price. But Bega may have its work cut out for it, with rival Murray Goulburn holding a 16.3% stake in Warrnambool and could potentially kick off a bidding war. Which it seems is what investors are banking on, with Warrnambool share rocketing up 33% and hitting $6.00 a share in lunchtime trading.

Warrnambool is Australia’s oldest dairy processor, and has been subject to takeover rumours for some time as Bega and rival Murray Goulburn both increased their stakes. At least one thing appears to be going right for Bega, with the Australian Competition and Consumer Commission’s (ACCC) preliminary view that the proposed acquisition does not appear to raise competition concerns. The ACCC still has to formally consent or state that it will not object to the takeover, following an informal review of the offer.

The deal certainly makes sense for Bega Cheese and Warrnambool, providing scale, creating efficiencies and synergies, while also giving the combine group more power in negotiations with supermarket retailers Woolworths (ASX:WOW) and Coles – owned by Wesfarmers (ASX:WES). The combined company would operate over seven sites, produce 353,000 tonnes of dairy products, process approximately 1.6 billion litres of milk from Australian dairy farmers and generate revenues of $1.5 billion from local and international customers.

Murray Goulburn has the size necessary to make a rival bid, producing 740,000 tonnes of dairy product and generating revenues of $2.4 billion, but the ACCC may have concerns that a combined Murray Goulburn/Warrnambool could create competition issues.

Foolish takeaway

Murray Goulburn may seek a draft view from the ACCC before making a bid, suggesting investors who have bid up the share price of Warrnambool to $6.00 are taking a risky bet on a bidding war.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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