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Takeover battle for Warrnambool heats up ag sector

Bega Cheese (ASX: BGA) looks like it’s got a battle on its hands if it wishes to secure a takeover of Warrnambool Cheese & Butter Factory (ASX: WCB) after the release this morning of an  announcement that the board of Warrnambool has entered into a deed and is recommending shareholders accept a rival bid pitched at $7 from Saputo Inc.

Saputo is listed on the Toronto stock exchange and is one of the largest dairy processors in the world with a market capitalisation of C$9.6 billion. Its $7 offer price represents an 11.2% premium to the implied value of Bega’s offer based on the closing price of Bega shares prior to the Saputo announcement.

It now looks almost certain that Warrnambool will be swallowed up by a suitor, which will mean one less agricultural play for Australian investors. With a decision regarding ADM’s takeover offer for Graincorp (ASX: GNC) postponed until at least mid-December, investors will remain uncertain regarding the approach the new government will take towards foreign investment in the agricultural sector.

The latest development at Warrnambool follows in an increasingly long line of recent merger and acquisition (M&A)activity amongst Australia’s major agricultural companies, most of which have led to a change of control. One M&A attempt which so far hasn’t been successful was farm input supplier Ruralco’s (ASX: RHL) offer to acquire the rural services division of rival Elders (ASX: ELD). Ruralco has since withdrawn its bid.

Foolish takeaway

While companies must play a clever hand and extract maximum value for shareholders, boards that completely reject takeover offers have a mixed record, and in a number of cases, shareholders would have been better served by a takeover proceeding.

However there are also a number of cases where shareholders have been well served by rejecting a suitor’s advances. For example in 2011 salmon farmer Tassal (ASX: TGR) rejected an offer pitched by private equity group PEP at around $1.90 per share — with the shares currently trading at over $3 per share, it looks like the board made the right call.

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Motley Fool contributor Tim McArthur owns a share in Tassal Group.

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