Saputo CEO says he didn't underestimate nationalism with Australian takeover bid

MONTREAL – The head of Canadian cheese giant Saputo remains confident about acquiring a leading Australian dairy processor despite the nationalist fervour that has been whipped up by rival bidders and opponents of the deal.

“We didn’t underestimate (Australian nationalism),” chief executive Lino Saputo Jr. told The Canadian Press. “You see it here in Canada, in Quebec, just about in most countries you see some sort of talk of nationalism.”

But after two visits Down Under in the past month, Saputo said he’s been a bit surprised by how much attention the process has garnered in Australia and the number of companies that have taken an active interest in Warrnambool Cheese and Butter.

“The fact that there’s a number of different players and that it (Warrnambool) is this sought out is surprising to me,” Saputo said in an interview.

Saputo said he’s hopeful of getting the go-ahead from Australia’s foreign review agency by the end of November, which would remove a major hurdle to the Canadian company’s bid and pave the way for wrapping up the transaction in early December unless other players enter the fray.

The Montreal-based company has offered to buy Warrnambool Cheese and Butter for the equivalent of C$523 million, including debt, but finds itself up against three rivals that now own nearly half of the target company.

Reports in Australia suggest one of the rivals — Bega Cheese — is considering boosting its bid to A$8 per share in cash. Murray Goulburn Co-Operative has bid A$7.50 per share.

With a 50 cents per share tax advantage, Saputo said its bid is within the range of Warrnambool’s current trading price of A$8.47 and far exceeds what Warrnambool’s advisers have said the company is worth.

“I think our price is a compelling price…and a fair price for shareholders,” he said.

Earlier, the cheese and dairy processor missed analyst expectations even though its net income increased 2.8 per cent to $133.3 million in the second quarter of its fiscal year.

The company said it earned 67 cents per diluted share in the period ended Sept. 30. That compared with 65 cents per share, or $129.7 million, in the prior year period.

Revenues were $2.23 billion, up 28 per cent from $1.74 billion a year earlier, largely due to a U.S. acquisition last January, along with higher selling prices in Canada, offset by lower cheese sales volumes in the U.S.

Saputo (TSX:SAP) was expected to earn 76 cents per share on $2.2 billion of revenues, according to analysts polled by Thomson Reuters.

Despite missing those forecasts, the CEO said he was pleased with the results in spite of competitive challenges, particularly among industrial and food service sectors in the United States that hurt volumes in the first part of the quarter.

“Our markets are challenging and consumption in some domestic markets is not growing at a rate that we would like and so, in order for different processors to increase their volume, they have to steal market share from someone else,” he said.

In Canada, efforts made earlier in the year to improve the division’s efficiency have stabilized operations, which should improve results in the remainder of the year, he added.

Pre-tax operating earnings in its Canadian division, which includes bakery operations, increased slightly to $116.7 million on $920.5 million of revenues. The U.S. segment’s profits increased 21 per cent to $107.9 million, while revenues soared to $1.08 billion, up from $632.7 million a year ago.

The international segment earned $15.8 million on $231.2 million of revenue.

Jonathan Lamers of BMO Capital Markets said the weaker than expected U.S. earnings was “slightly negative.”

“This is the fourth consecutive quarter that Saputo has experienced lower selling volumes of cheese in the U.S.,” he wrote in a report.

As for the new Canada-European trade deal, Lino Saputo said Canada as a whole may benefit but the Canadian dairy industry will be hurt by a doubling of permitted imports. Still, he said the company has a few years to adjust before the deal is ratified and implemented.

“Over the course of the next couple of years we will find ways to mitigate some of this impact on us. I think the real casualties in this will probably be the artisanal type manufacturers that will see more European imported products that will compete with their products.”

On the Toronto Stock Exchange, Saputo’s shares closed at $49.99, down $1.26, or 2.46 per cent, in Thursday trading.