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Battle for Warrnambool not over yet

Many investors have assumed the battle for control of Warrnambool Butter and Cheese Factory (ASX: WCB) is over, now that Bega Cheese (ASX: BGA) has agreed to sell its 18.8% stake to Canadian dairy giant Saputo.

Saputo says it has increased its holding in Warrnambool to 46.2%, giving it close to a majority shareholding – but also lifting the price it pays for Warrnambool’s shares from $9.00 to $9.20.

Even Warrnambool’s CEO David Lord seems to think this signals the beginning of the end for the battle for control of his company.

But that ignores the fact that Kirin Holdings, through its local subsidiary, Lion, holds a 10% blocking stake in the company. Privately owned dairy producer Murray Goulburn also holds a 17.5% stake in Warrnambool, but its takeover bid for the company is awaiting a decision by the Australian Competition Tribunal, which should come before the end of February.

Lion regards it stake in Warrnambool as strategic, and at this stage appears unlikely to sell. Lion has a supply agreement with Warrnambool for its Coon and Cracker Barrel cheese brands. Saputo may need to guarantee those supply agreements and possibly provide other concessions to get Lion to sell, with Lion holding the upper hand in any negotiations.

For Murray Goulburn, one option includes selling out and realising an estimated profit of around $95 million, which it could use to cut debt, or invest in further milk processing operations.

Bega has already made an estimated pre-tax profit of between $62 and $68 million, following its sale to Saputo, but it could be the subject of a takeover bid itself, with New Zealand dairy giant Fonterra (ASX: FSF) buying into Bega in early November.

Foolish takeaway

While the battle may look over, should Lion and/or Murray Goulburn refuse to sell out, Saputo could be left holding just over half of Warrnambool, and would then need to decide whether it was happy with that, or sell up and head home.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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