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The battle for Warrnambool

The battle for Warrnambool Cheese & Butter Factory (ASX: WCB) has hotted up, possibly more than any of the likely bidders could have seen.

Yesterday, beverage and dairy products company Lion, which is owned by Japanese giant Kirin, and is the owner of brands such as Berri, Dairy Farmers and PURA, scooped up 10% of Warrnambool shares as part of an assumed so-called blocking stake.

Lion doesn’t want to see any of the three current bidders taking over Warrnambool, and would be worried about other players grabbing a larger share of Australia’s dairy market.

Background

But first, let’s revisit what has happened so far. In September, Bega Cheese (ASX: BGA) made a bid for Warrnambool valued at around $320 million and valuing Warrnambool’s shares at around $5.78 each. The suitor was offering 1.2 Bega shares plus $2 cash for each Warrnambool share. Bega already had an 18% stake in its would-be prey.

Then on October 8, Canadian dairy giant Saputo Inc. announced that it too was making a bid for Warrnambool, with its offer of $7.00 per share trumping Bega’s bid by a fair margin.  Ten days later, Australia’s largest dairy food company and owner of 17% of Warrnambool, Murray Goulburn Co-operative, announced that it was joining the party, with an all cash offer of $7.50 per share topping Saputo’s bid, and besting the independent expert KPMG’s assessment of Warrnambool’s value. KPMG had valued Warrnambool shares at between $6.96 and $7.49.

Then, just a week later, Saputo revised its bid to $8.00 cash per share, which is the current highest bid.

Where to from here?

That’s the $64 million question.

Saputo, with a market cap of C$10 billion has the firepower to come back with a higher bid, and has already shown that it is willing to up its offer. But Lion has now gained a seat at the bargaining table, and is reportedly keen to see Warrnambool remain as an independent listed company.

Standing in the path of all four companies are Australian dairy farmers, who own an estimated 30-40% of Warrnambool.  They are likely to have the last say over the outcome of the takeover bids, and Saputo, Lion, Murray Goulburn and Bega have a lot of wooing to do. Obviously, dairy farmers are most likely to agree to sell their shares to the company that they trust to look after their interests.

The other issue is one of national interest. There is a rising chorus of voices suggesting Australia has in the past undervalued its prized agricultural assets, leaving them open for takeover by foreign bidders. We’ve seen the Australian Wheat Board (AWB) taken over by US company Agrium, ABB Grain fell into the hands of Canada’s Viterra, National Foods was taken over by Kirin – and is now part of the stable at Lion, and Graincorp (ASX: GNC) is the subject of a takeover bid by US firm Archer Daniels Midland (ADM).

Some farmers are worried that Australia could miss out on the benefits of a boom in Asian foodstuffs demand, with profits going to offshore companies. Demand for dairy products in Asia is reportedly growing at around 6 per cent a year, while supply is growing at less than half that rate.

Others have suggested that listed companies’ primary duty is to their shareholders, not the producers, which means maximising profits and cutting costs – even if it comes at the expense of the local industry.

Then there are also political and competition issues. Saputo needs to get approval from the Foreign Investment Review Board for its bid, while Murray-Goulburn is likely to need the consent of the Australian Competition and Consumer Commission.

Foolish takeaway

The story still has more twists and turns to take, but with Lion holding a 10% stake in Warrnambool, the chances of a takeover going ahead appear to have fallen dramatically. As a result, downside risk to the share price has increased, while the upside might be limited. Existing shareholders may want to take some or all of their money off the table.

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

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