Warrnambool Cheese & Butter Factor Co. hit by falling dairy prices

Credit: Bertalan Szürös

Warrnambool Cheese & Butter Factor Co. (ASX: WCB) has announced a huge deeply-discounted rights issue to raise up to $142 million to pay down debt.

Warrnambool is currently majority owned by Canadian dairy company Saputo, with an 87.9% holding. Saputo has committed to take up its share – in other words pumping around $127 million into the company.

Lion Dairy & Drinks is Warrnambool’s other major shareholder, holding just over 10% of the company.

Warrnambool has been hit hard by the fall in global dairy prices, recently announcing a full year profit of just $4.2 million for the 12 months to end of March 2016 (FY16). That was down 88% compared to the nine months ended March 2015.

The dairy company also reported in May that it expects international dairy prices to remain weak in FY2017, thanks to overwhelming supply.

Warrnambool is now raising $142 million by issuing shares under a renounceable rights issue at $6.75 per share – an 18% discount to the last closing price of $8.50 yesterday.

Dairy companies have been in the news recently, after Murray Goulburn slashed the payments it would make to dairy farmers and CEO Gary Helou announced his resignation. That saw the MG Unit Trust (ASX: MGC) share price tumble from above $2.00 to as low as 82 cents in mid-May.

Murray Goulburn now faces a shareholder class action, alleging that the company knew that sales forecasts in its prospectus were unlikely to be achieved, and never disclosed problems the company was having.

Supermarket retailers Coles – owned by Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) have also copped a backlash over their sales of cheap home brand milk for $1 a litre. Many consumers appear to have taken it upon themselves to help farmers by avoiding the cheap milk and buying branded milk.

Foolish takeaway

Warrnambool should really attempt to delist itself given it had just 465 investors other than Saputo and Lion at the beginning of May 2016.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson

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