Saputo moves closer to closing Aussie dairy deal

Saputo leaped closer to acquiring a majority stake in Australia's oldest dairy processor after a one-time rival agreed to sell its shares in Warrnambool Cheese & Butter.

Bega Cheese Ltd. announced Thursday it will sell its 18.8 per cent stake to Saputo.

That would give the Canadian dairy giant control of 45.2 per cent of Warrnambool, according to the most recent available tally.

"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," Saputo spokeswoman Sandy Vassiadis said in an interview

Saputo disclosed on Monday that it had voting control over 26.4 per cent of Warrnambool shares. It hasn't commented publicly on Bega's announcement to the Australian Securities Exchange.

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.

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- RBC analyst Irene Nattel

Australia's fifth largest dairy processor said it expects to earn a profit before tax and costs of between $61.8 million and $68.2 million Australian ($60 million to $66.5 Cdn)  from selling the shares, depending on the ultimate price paid by Saputo. That's a huge windfall for a company that earned just $15.9 million Australian on $491 million of revenues last year.

Montreal-based Saputo has offered at least $9 Australian per Warrnambool share, $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 $9.40 on the Australian Securities Exchange, suggesting investors expect Saputo to get a solid majority of WCB shares.

Saputo is offering $9.40 per share if it gets 75 per cent of Warrnambool and $9.60 if it gets 90 per cent. Its offer expires Jan. 22.

Its shares gained 57 cents to $51.51 Cdn in early trading on the Toronto Stock Exchange.

One rival remains for Saputo

The Canadian cheese company continues to face one rival, Murray Goulburn — Australia's largest dairy processor — which owns about 17.7 per cent of Warrnambool.

The co-operative is offering $9.50 Australian 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. It said selling now was the best financial outcome for its shareholders, saying the risk was too great to wait for the competition tribunal's decision or until a fourth bidder emerged.

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

Competition tribunal hearing

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.

"Bega Cheese's investment in Warrnambool Cheese & Butter has been a resounding success for both companies, enabling WCB to pay down debt in a time of need and positioning the company for the future," stated executive chairman Barry Irvin.

"Bega Cheese's takeover offer was the catalyst for a process which has highlighted the value of the Australian dairy industry, a rerating of Bega Cheese's share price and a substantial profit for Bega Cheese."

Irene Nattel of RBC Capital Markets said Bega's decision to sell its shares to Saputo is a "significant step forward" for 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.