THERE are now three companies vying to take over Warrnambool Cheese and Butter – Bega Cheese, Murray Goulburn and Saputo. A fourth, Fonterra, is rumoured to be interested in having a crack as well.
Naturally, plenty of people have an opinion as to which company ought to succeed, if any - including me. The range of issues these bids raise is quite fascinating.
Two of the potential suitors, Saputo and Fonterra, are foreign owned; by Canadians and New Zealanders respectively.
There may be competition issues.
A 2010 bid by Murray Goulburn received a negative response from the Australian Competition Consumer Commission (ACCC). The bid by Bega has the potential to raise the same issues. This time Murray Goulburn has decided to bypass the ACCC and go straight to the Australian Competition Tribunal in the hope it will get a better hearing.
There may be debt issues.
Murray Goulburn is a co-operative, which limits its ability to raise capital, while WCB is a public listed company. If Murray Goulburn succeeds and delists WCB, how will it manage the resulting debt? Will WCB’s milk suppliers be willing to join the co-operative? Or might the takeover be a way to escape its cooperative bonds and achieve a backdoor listing?
The Bega offer comprises a mix of cash and shares. That led it to ask the company’s shareholders to amend the constitution to allow a single shareholder to own more than ten per cent of the company. WCB shareholders may end up owning a sizeable chunk if it wins.
On the other hand, Saputo and Murray Goulburn are simply offering cash, which would leave WCB shareholders with no stake in the ongoing business if they accept, although shares in Saputo can be bought on the Toronto stock exchange.
Bega currently owns 18 per cent of WCB while Murray Goulburn owns 17 per cent, yet the WCB board recommends shareholders accept the higher Saputo offer, which has fewer conditions, “in the absence of a superior proposal”.
What would Bega and Murray Goulburn do with their shares if they fail to win control, given they have enough to make a nuisance of themselves?
There is even a personal connection. The executive chairman of Bega was a director of WCB until March this year.
All in all, it’s a complex situation and a long way from over.
WCB is a survivor from a time when there were butter and cheese factories in lots of regional towns. Unlike most of its contemporaries, which disappeared long ago, it grew to become a substantial business.
It was listed on the ASX in 2004 and today processes about 900 million litres of milk, turns over close to $500 million, and exports to numerous countries.
The reason the company is susceptible to takeover is that, despite its relative growth, it remains a minor player in a large, global market. It is very exposed to changes in global prices and needs greater scale to maintain consistent earnings. Net profit last year was $7.5 million, down 50 per cent on the prior year and representing just 4.6pc return on equity.
At that rate, whoever wins control would struggle to be able to use earnings to cover the interest on the acquisition cost.
Indeed, whether it makes sense for any of the suitors to buy WCB is a question that hasn’t come up.
It would not be possible to take over Murray Goulburn or Fonterra due to their co-operative structure, while recently listed Bega was protected by its constitution until the latest change. It will never be known whether the shareholders of these companies would be better off selling rather than buying.
Some people, the Victorian Farmers Federation among them, would like shareholders to vote to keep the factory in Australian hands. They think it would help underwrite prices paid to farmers, although how that might work is a mystery. Those who currently supply foreign owned dairy processors have not suffered lower prices.
There are plenty who would prefer the company’s shareholders not accept any offer, but to leave things as they are. They simply do not like change. And some want the government to intervene to prevent the company falling into the “wrong hands” or sending all their profits overseas, such as they are.
I don’t have shares in WCB, which puts me in the same position as most of those offering an opinion, including politicians and bureaucrats. No matter how informed or well-intentioned we might be, our opinions are irrelevant. We have no skin in the game.
The only people who matter are the shareholders. Their shares are private property, over which they should have sole authority. Subject to the law, nobody else has any say.
Moreover, they should be free to keep their shares, or to sell them to whoever they please, without restriction. There is already far too much interference with private property to contemplate any more. That includes the ACCC.
Contested takeovers are fascinating examples of the market in operation. With eager buyers, careful sellers and a lack of outside interference, the right result is certain.
David Leyonhjelm has been an agribusiness consultant for 25 year and was recently elected to the Senate for the Liberal Democrats. He may be contacted at email@example.com