THE bid by Canadian company Saputo to take over Warrnambool Cheese and Butter (WCB) seems destined to fail.
Its offer closes this evening and in the absence of a last-minute flood of acceptances it will end with Saputo owning a little more than 20 per cent of the share register. It could extend the period, but there seems little point. With the offer declared final there’s nothing new to offer and shareholders have had ample time to consider the terms and make a decision.
If the bid fails, any hope of Saputo gaining control of WCB will lie in cutting a deal with the other major shareholders. Bega Cheese owns 18.9 per cent, Lion 10 per cent, rival bidder Murray Goulburn 17.7 per cent and there are some smaller holdings of a few per cent in the hands of investment companies.
Saputo’s failure would leave Murray Goulburn’s offer of $9.50 per share as the only remaining bid, with Bega having already bowed out of the race.
For Murray Goulburn it would seem to be the dream scenario as it negotiates regulatory clearance through the Australian Competition Tribunal (ACT).
It needs clearance before being allowed to proceed, but getting that clearance isn’t going to be easy, judging from events at a preliminary hearing earlier this week. A submission to the tribunal from the Australian Competition and Consumer Commission (ACCC) has challenged several key aspects of Murray Goulburn’s application.
Before delving into what the ACCC said, it’s worth explaining the process that Murray Goulburn is facing.
When managing director Gary Helou launched Murray Goulburn’s bid, he chose to take the application through the ACT, rather than the ACCC. The ACT was set up several years ago as an alternative competition regulator that can consider wider implications of a takeover, not just the competition aspect to which the ACCC is confined.
The ACT can consider matters such as public benefit in reaching a decision.
While the tribunal has existed for years, Murray Goulburn is the first company to use it, believing that the merger has a better chance of being approved via that route.
It was probably a wise move given that the ACCC expressed competition concerns in an interim finding while considering a 2010 attempt by Murray Goulburn to acquire WCB.
Murray Goulburn strategically withdrew that application before the ACCC reached a finding.
Mr Helou contends that the merger of Murray Goulburn and WCB would have considerable benefits for the public and the dairy industry and he believes these will be sufficient to outweigh any concerns about reduced competition.
But the ACCC is not completely out of the picture. The ACCC can make its own submissions to the tribunal about concerns it has with an application. It can also put the case for third parties. It effectively acts as a prosecutor, challenging claims made in a submission.
That’s what the ACCC did this week — and Murray Goulburn won’t be too thrilled about what it said.
Gary Helou’s mantra throughout the bidding process has been that the combined entity would create a globally-significant industry player able to expand into emerging markets by selling large volumes of high-value products.
“There is a massive demand, more than we can supply,” Mr Helou said at a meeting with WCB shareholders and suppliers in November.
“We need scale to meet that demand. We can’t do it while our dairy industry remains fragmented.”
The ACCC questioned this. “It is not clear that the proposed acquisition will have a significant effect on the volume or value of Australian dairy exports,” the commission wrote in its 76-page submission.
“Both Murray Goulburn and WCB are shifting their product mix toward high value products in any case. Benefits in terms of obtaining relevance with international customers may be achieved through measures other than the proposed acquisition, such as joint ventures.
“Murray Goulburn has not quantified the claimed increase in the real value of exports and has not provided detail of the associated costs of achieving such an increase.”
Mr Helou has also made much of the synergies and operational efficiency that would result from a merger and the benefits these would feed back to suppliers in the farm gate milk price.
But the ACCC challenged the assertions in the submission.
“It is not clear that Murray Goulburn has used an appropriate methodology to quantify its claimed public benefits from synergies, particularly in estimating the effect of these synergies on its farm gate milk price.
“Some of Murray Goulburn’s claimed public benefits relating to operational efficiencies may be able to be achieved through measures other than the proposed acquisition,” the commission wrote.
The ACCC also raised concern about what would happen at different levels of ownership. If Murray Goulburn acquired between 50 and 90 per cent, WCB would continue to operate as a public listed company and would therefore operate under a separate board, with responsibility to WCB shareholders and the ASX.
“WCB directors, who are required to act in the best interests of WCB and its shareholders as a whole, would be required to take into account the interests of shareholders other than Murray Goulburn,” the commission wrote.
“Murray Goulburn may not be able to change the constitution of WCB or pass special resolutions, which require approval of 75 per cent of votes cast.”
Only on obtaining 90 per cent would Murray Goulburn be able to absorb WCB into its co-operative structure.
“This would appear to be material to the likelihood of Murray Goulburn achieving many of the claimed public benefits,” the ACCC submitted.
The potential reduction of competition for milk in the south-west is the major issue facing Murray Goulburn’s bid.
On this point, the ACCC suggested looking at the competition effect across a narrower geographic market than that used by Murray Goulburn in its submission, pointing out that Murray Goulburn and WCB are close competitors for raw milk.
“Other competitors may not provide a strong competitive constraint on Murray Goulburn post-acquisition,” it wrote.
The effect on milk price of the co-operative’s proposed ASX capital-raising entity was also questioned.
“The capital restructure proposed by Murray Goulburn may impact on the incentives that, according to Murray Goulburn, currently mean its profits are passed on to farmers in the form of higher milk prices.”
The ACCC suggested that, if the tribunal approves the merger, it should occur within 12 months because of possible changes in market conditions and competition dynamics.
The ACCC has also received submissions from third parties, including one from WCB opposing Murray Goulburn’s proposal. The commission said the limited time between receiving these submissions and providing its document to the tribunal meant that not all submissions had been taken into account.
The tribunal declined a request for an extension of the process, insisting that it proceed to a five-day hearing from February 10 and a decision in late February.
Steve Hynes is a WCB shareholder.