No skin in the game

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
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    28/10/2013 5:50:51 AM

    With WCB board it is sell sell sell! Obviously they had no idea of the true value of the company they were managing because since the first offer they recomended to grab the price has doubled This begs the question: "How many boards are of the same ilk, ready to grab that quick dollar which are not in the best interests of either shareholders, suppliers or even customers?" Many companies that started as farmer co-operatives have been incorporated then sold off through the scam of telling farmer owners they were getting a better deal.
    28/10/2013 6:13:30 AM

    That's because they were..funny ...getting a better deal!. look at wesfarmers, incitec etc. And don't talk about staying in control if it means unsustainable pricing or being starved of capital, or in the case of AWB corruption!!
    28/10/2013 11:34:10 AM

    Apt name, "Hydatid", for such an inane comment about AWB corruption. Please inform yourself of the facts and don't make unfounded comments about things you know nothing about.
    28/10/2013 12:03:49 PM

    Percy, EVERY shareholder has the option of selling or retaining. The board suggesting you sell, doesn't mean you have to. The best interests of the company aren't always in the best interests of every shareholder, as people buy with intent to sell after differing periods of ownership. The price may have doubled for a number of reasons, including speculative purchasers upon hearing of the take over. It doesn't mean the shares are actually worth double the price they were at initial offer stage. NEVER, EVER leave it upto the board alone to advise you on share divestment decisions!
    28/10/2013 2:22:42 PM

    Sorry - $300 M worth of kickbacks, $40 M in out of court settlements, $100 K individual fines as well as bans on directorships, civil cases are right I'm out of my depth and I take everything back
    stephen butler
    28/10/2013 4:08:24 PM

    As a shareholder in wcb my decision on the value of my shares will be decided by the market.I have put my cash on the line by purchasing shares in wcb when they first listed.If I and other shareholders are rewarded then so be it .That is capatalism at work.
    28/10/2013 8:06:49 PM

    Hydatid, you got it right. I was about to make the same post as you did!! Well done. Some of us obviously have a far better memory than Michael has.
    29/10/2013 7:28:33 AM

    But, really, what if someone intentionally have been managing the company that poorly, in order to persuade people that there is almost no profit for their shares, so "sell it now!"?
    30/10/2013 4:45:15 AM

    Intentional maybe not Eug145...but the list of value destruction is endless in agri bis history in Australia. It is even current with a few industry icons i don't need to mention. David has already adequately donethat in previous blogs
    31/10/2013 5:47:34 AM

    Thank you for your reply! I shall definitely read more what Mr. Leyonhjelm wrote in this blog. With regard to "value destruction". It is a commonplace method for takeover of public companies here, in Ukraine, where I live now. A public company, which has been destined for such an "attack", is infiltrated by corrupt managers and then it is being led to failure, or some troubles are made externally, which complicate business of the company (for instance, trade restrictions by corrupt government).
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    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at


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