Canadian dairy processor Saputo looks set to take control of Warrnambool Cheese and Butter (WCB) with a $7 a share offer valuing the company at $370 million, which trumps an existing cash and shares offer from Bega Cheese which values WCB at 320 million.
$7 a share is a substantial premium over the Bega offer price for WCB, and appears to be a very full price on any conventional analysis. Trouble is however, that conventional analysis has some difficulty factoring in the strategic value of the business, one of only three substantial dairy businesses left in Australian hands.
WCB’s performance was woeful a few years ago, being on its knees in 2009 after a trading loss of $20 million on $441 million turnover, and having unsustainable gearing. Since then there has been improved but patchy performance, $8.8 million profit in 2010, peaking at $18.5 in 2011, down to $15.2 in 2012, and down again in 2013 to $7.5 million.
WCB has flown a bit under the radar as the dairy industry has been convulsed by take-overs and mergers in the last 25 years, and is now one of just three locally owned dairy businesses with any scale. The other two, Bega and Murray Goulburn have both tried to find a way to consolidate with WCB, and the Bega Chairman has been on the WCB board for several years, so should know the business inside out.
With 2 billion rapidly emerging middle class consumers on our doorstep in Asia, whose consumption of dairy products is rapidly increasing, the strategic value of WCB to the Australian economy is significant. However, the reality is that without a better offer, and subject to FIRB approval, (should not be a problem) WCB will be sold to Saputo.
Part of the challenge is the disconnect between the domestic market where the retail oligopoly is the price setter, and export markets where Australian dairy produce is a price taker. Inability to generate anything more than the cost of capital, at best, domestically, and subject to big fluctuations in international commodity prices and exchange rates, and not being a low cost producer, Australian returns in the industry have been very inconsistent. Now however, with the emergence of the Asian consumer, there is long term potential for value added margins. What is needed is patience, operational and business model innovation, and some really good leadership.
Pity we are no good at that
Also sitting on the desk of the new treasurer is the proposed takeover of Graincorp, by US company Archer Daniels Midland. Graincorp handles 90% of Eastern Australia’s grain exports, and roughly 75% of the crop, so is pretty central to the success of the Australian grains industry. A similarly strategic Australian asset that seems destined to be run for the benefit of others.
What do these North Americans see that we cannot?
Vale the Australian owned food processing industry.