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Warrnambool Cheese gets second takeover offer

Who knew that the world of dairy products could get this exciting? Warrnambool Cheese (ASX: WCB) is caught up in two takeover offers currently, and the participants have been involved with the company before. A third party that may influence the outcome of either deal is a major shareholder who once tried to take over the company itself.

The latest bid launched by the Canadian dairy company Saputo is for $7 a share, which is higher than the cash and script offer from Bega Cheese (ASX: BGA) that was announced in September. Bega’s $319 million offer was for $2 cash with 1.2 Bega shares for every share, which at that time was about $5.78 a share in total value.

Warrnambool Cheese CEO David Lord said that it didn’t represent good value since he projected his company’s earnings would be going up more than Bega’s, and the deal was “highly opportunistic” when the dairy industry was at a cyclical low.

Bega is already a major shareholder, holding 18% of the company, and sees its takeover as a way to combine the two, and create an Australian company that can better operate on a world stage. Another major shareholder, controlling 16% of the company is Murray Goulburn, a privately held dairy products manufacturer, made a takeover offer three years ago.

Together, these two companies control 34% of the company, so although the Warrnambool Cheese directors have recommended that the Bega offer be rejected, and the Saputo offer better reflects the company’s real value, the new deal may not get off the ground. These two dairy companies would like to retain control of the industry domestically.

Saputo was possibly interested in buying the company as far back as 2009, but Bega’s takeover offer moved its hand to throw its hat in the ring. International dairy prices are rising because of higher demand, especially in Asia as eating habits are becoming more westernised.

Domestic market prices for milk have been in the news concerning how dairy farmers are seeing higher costs at the same time having to supply milk at very slim profit margins to supermarket giants Woolworths (ASX: WOW) and Coles, which is owned by Wesfarmers (ASX: WES).

Foolish takeaway

Exporting more improves profit margins for dairy companies, so Warrnambool Cheeses has become the centre of attention. If Bega wins in its bid, then further cooperation with Murray Goulburn will further consolidate the industry.

Many times when a takeover is announced, the share price of the target company jumps quickly, catching investors off-guard to react. There can be a second or even third offer, so there may be opportunity to get a quick return in a short time, but the share price can just as easily drop if the takeover fails.

Don’t get caught by the hype. Always research the company for its intrinsic value before investing. By doing that, you have a quality investment whether the deal goes through or not.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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