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Why the Bega Cheese Ltd (ASX:BGA) share price has tumbled lower today

In morning trade the Bega Cheese Ltd (ASX: BGA) share price has emerged from its trading halt and sunk notably lower.

At the time of writing the food company’s shares are down 5.5% to $7.15.

Why are Bega Cheese’s shares sinking lower today?

This morning Bega Cheese’s shares resumed trade after the company successfully completed a non-underwritten institutional share placement to raise approximately $200 million.

Bega advised that it raised the funds at $7.20 per share, which was a 5% discount to the last close price.

The company will now attempt to raise a further $50 million through a share purchase plan. However, with its share price now falling below the offer price, I’d be surprised if the company was able to raise these additional funds unless the share price rebounded strongly in the coming days.

Why is it raising funds?

Although the company has been linked with a takeover of Capilano Honey Ltd (ASX: CZZ) recently after picking up a substantial holding in the honey producer, management plans to use the funds to shore up its balance sheet after recent investments.

This year Bega Cheese acquired the Koroit dairy processing plant from Saputo Dairy Australia for $250 million.

Executive chairman, Mr Barry Irvin, explained that: “Bega Cheese has always had a commitment to maintaining a strong balance sheet and this capital raising ensures we are appropriately geared should further opportunities arise.”

What now?

I can’t say I’m surprised to see its shares tumble lower today. This placement added 27.8 million new fully paid ordinary shares to the registry, causing reasonable dilution to existing shareholders.

However, as Mr Irvin said, the company is now appropriately geared to seize on any opportunities that arise. Thus, if the company uses these funds to create value through acquisitions then it could ultimately be worth the dilution.

I’m sitting on the fence with Bega Cheese and would class it as a hold at this point. Instead, I see more value in the shares of A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.