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Goodman Fielder Limited under attack

Due to sustained lowering of earnings Goodman Fielder (ASX: GFF) has seen its share-price continually disappoint shareholders over recent years. In fact earnings per share have dropped every year from 15.6 cents in the 2008 fiscal year down to 3.7 cents for the year ending June 2013. In unison, return on shareholders’ equity has shrunk from over 10% to less than 5% in five years. In April 2014, Goodman Fielder received a takeover offer of 65 cents per share but this was rejected by the board as materially undervaluing the company.

Background

Goodman Fielder is a well known manufacturer of many food products. Traditionally the company has developed strong brand names and supplied a large consumer market. It manufactures and distributes food ingredients, consumer branded foods, beverages, bread, dairy products, small goods, flour and other related products. Goodman manufactures in almost 50 plants in Australia, New Zealand, Papua New Guinea, Fiji and New Caledonia.

The Baking Division has a portfolio of food brands with three of the top five proprietary bread brands in Australia and six of the top 10 proprietary brands in New Zealand. The Dairy Division is a major participant in the New Zealand dairy industry. The Grocery Division supplies consumer food products to supermarkets in Australia and New Zealand. The Asia Pacific division is an important food supplier to the Pacific islands. Also, the company has an emerging presence in the East Asian region with a focus on China, the Philippines and Indonesia. In December 2013, Goodman sold its Biscuits, Meats and Pizza businesses.

The major problem for Goodman has been the almost relentless squeeze on prices, and thus margins of it products, due to pressure from major customers, Woolworths (ASX: WOW) and Coles, the subsidiary of Wesfarmers (ASX: WES).

Merger and Acquisition

Recently Victorian dairy company Warrnambool Cheese (ASX: WCB) was acquired by the Canadian company, Saputo, for $500 million. Bega Cheese (ASX: BGA) and Murray Goulburn had failed in their attempts but walked away with $100 million and $92 million, respectively.

Goodman, with its large dairy holdings, has now become the next target, as the potential for export to South East Asia heats up. The Singaporean agribusiness, Wilmar, and the Hong Kong investment company, First Pacific, have bid $1.27 billion at 65 cents per Goodman share. Should Goodman divest itself of its dairy interests, these suitors have threatened to walk away. The French company, Parmalat, which has the Pauls, Oak and other well known brands, may enter the bidding. Its CEO, Craig Gavin, said “strategically, the New Zealand dairy business is of interest and we will keep an eye on it.”

Choices

1. Shareholders accept an offer from Wilmar and First Pacific.

2. Parmalat, or another company, makes a successful superior offer.

3. Goodman sells its New Zealand diary business.

4. An Australian or New Zealand white knight partners with Goodman in a joint venture, to more aggressively export into the massive and growing South East Asia dairy market, particularly that in China.

Shareholders Action

I would advise shareholders not to accept the current 65 cent bid and to wait as long as possible till the last card has been played. Hopefully the third choice prevails, so that the dairy and associated businesses remain in local hands.

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Motley Fool contributor Chris Koenig does not have shares in the companies mentioned.

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