Bega Cheese to sell its minority stake in Australian dairy processor to Saputo

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MONTREAL – A one-time rival has agreed to accept Saputo’s offer for Warrnambool Cheese & Butter, putting the Montreal-based concern a big step closer to gaining control of Australia’s oldest dairy processor.

Bega Cheese Ltd. announced Thursday that it will sell its large stake to Saputo, which continues to face one rival bidder.

The addition of 11 million shares representing 19.7 per cent of Warrnambool (AUX:WCB), gave the Canadian dairy giant control of 46.2 per cent of the company, according to the most recent available tally, but a Saputo spokeswoman remained cautious about the progress of the takeover bid.

“We’re really happy with the outcome this morning but there’s still days left in the offer and there’s still work to be done,” Sandy Vassiadis said in an interview.

Saputo (TSX:SAP) disclosed on Monday that it had voting control over 26.4 per cent of Warrnambool shares. It is expected to provide an updated tally of its stake in WCB once the Australian Securities Exchange opens for Friday trading.

Bega launched the bidding war in September with a cash-and-share offer, but let it lapse amid higher all-cash bids from Saputo and Murray Goulburn Co-operative, Australia’s largest dairy business.

Bega, which is Australia’s fifth-largest dairy processor, said it expects to earn a profit before tax and costs of between AU$$61.8 million and AU$68.2 million from selling the shares, depending on the ultimate price paid by Saputo.

That’s a huge windfall for a company that earned AU$15.9 million on AU$491 million of revenues last year.

Saputo has offered at least AU$9 per Warrnambool share, AU$9.20 if it gets more than half of its stock and even more if it gets a larger majority.

Warrnambool shares closed Thursday at AU$9.40 on the Australian Securities Exchange, suggesting investors expect Saputo to get a solid majority of WCB shares.

Saputo is offering AU$9.40 per share if it gets 75 per cent of Warrnambool and AU$9.60 if it gets 90 per cent. Its offer expires Jan. 22 but would be extended by 14 days if it obtains majority control.

Saputo shares closed at C$51.68, up 74 cents or 1.454 per cent, Thursday on the Toronto Stock Exchange.

Murray Goulburn, a co-operative that owns about 17.7 per cent of Warrnambool, is offering AU$9.50 per WCB share but on the condition it gets approval from Australia’s competition watchdog.

Both Bega and Murray Goulburn have promoted their bids as a way to maintain Australian control over Warrnambool, which Saputo sees as a foundation for growth in the Asia-Pacific region.

Bega said Thursday that it was disappointed that it was unable to merge with WCB or at least have the company remain Australian owned and operated, but decided Saputo’s offer was the best option.

Selling now was the best financial outcome for Bega shareholders, the company said, adding that the risk was too great to wait for the competition tribunal’s decision or for a fourth bidder to emerge.

The Australian Competition and Consumer Commission, which is helping the tribunal in its review of Murray Goulburn’s bid, raised concerns that the combination could reduce competition for the acquisition of raw milk in the country.

The tribunal is slated to begin five days of hearings Feb. 10 with a decision as early as Feb. 28.

Irene Nattel of RBC Capital Markets said Bega’s decision to sell its shares was a “significant step forward” in Saputo’s pursuit of WCB.

“At this point it would appear the question is not whether Saputo will gain control, but rather at what level of ownership and at what price,” she wrote in a report.

Nattel said she expects Japanese conglomerate Kirin, whose subsidiary Lion owns 9.9 per cent of WCB shares, will eventually tender as well.

Keith Howlett of Desjardins Capital Markets said prior to posting of Saputo’s updated tally that the only thing that could derail Bega’s intention to tender its shares would be if Murray Goulburn increases its conditional bid when the Australian stock market opens.

“The probability of Saputo acquiring effective control of Warrnambool appears to have increased substantially. It appears that tomorrow, Jan. 17, is likely to be the watershed day for its bid,” he wrote, adding that the WCB acquisition is Saputo’s first step in building a business in Australasia.

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