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Bidding war for Warrnambool?

The fight for control of Warrnambool Butter and Cheese Factory (ASX: WCB) is hotting up, with a third bidder lobbing a bid for the daily producer.

Fellow dairy producer Murray Goulburn Co-Operative, which currently owns more than 17% of Warrnambool, has today announced a $7.50 cash per share bid, trumping prior bids from Bega Cheese (ASX: BGA) and Canadian dairy giant, Saputo.

Murray Goulburn says its bid is 66% higher than the $4.51 closing price of Warrnambool’s shares on September 11, prior to Bega’s offer, 7% higher than Saputo’s $7.00 cash per share offer, and 13% more than the implied value of Bega’s bid. The Co-op also says that its offer is at the high end of an independent expert’s assessed value range.

Accounting firm KPMG has assessed Warrnambool’s share value as between $6.96 and $7.49. KPMG valued Bega’s bid as between $5.77 and $6.08. As a result Warrnambool has rejected Bega’s bid and directors unanimously recommended shareholders take up Saputo’s offer.

The arrival of Murray Goulburn on the scene has now thrown the cat among the pigeons, and we could see a bidding war erupt. The main fly in the ointment for Murray Goulburn is that a 2010 bid for Warrnambool was withdrawn after the Australian Consumer and Competition Commission (ACCC) raised questions about the bid. At the time, Warrnambool directors also said the bid was not in the interests of shareholders and suppliers. Murray Goulbourn had offered $4.35 cash per Warrnambool share. It will be interesting to see if Warrnambool directors recommend the bid this time, given the much higher price.

All three companies want to take advantage of increasing demand for dairy products from Asia, especially China and India. Warrnambool exports most of its product, and last year produced 143,000 tonnes of dairy product, including cheese, milk powder and infant-formula ingredients.

China is setting new records for milk-powder imports, after local contamination issues cast a cloud over locally-sourced dairy products. And New Zealand’s Fonterra (ASX: FSF) has also been embroiled in recalling infant formula products, suggesting demand for Australian milk products could surge higher.

Foolish takeaway

Despite Murray Goulburn’s bid being higher than both current bidders, it may have the biggest hurdle in the form of the ACCC to clear, so there’s no certainty that its bid will be the winning one. Investors may want to sit this one out and watch from the sidelines.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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