Warrnambool Cheese and Butter Factory: What’s behind the bidding war?

A bidding war is heating up for Australia’s oldest listed milk processor, as Canadian company Saputo and local company Bega Cheese compete to take over the Warrnambool Cheese and Butter Factory.

Yesterday Canadian dairy company Saputo made a bid of $390 million for the factory, offering $7 cash per share for WCB.

The new deal comes after last month the WCB board urged shareholders to reject Bega’s $319 million offer, saying the move was “highly opportunistic”, given improving market conditions.

In contrast to the board’s reaction to Bega, WCB chief executive David Lord is urging shareholders to accept the offer from Saputo.

It’s not the first time other businesses have expressed interest in the 125-year-old business. In 2010 WCB rejected an acquisition proposal from Murray-Goulburn Co-operative.

The company has a strong history, having already overcome major obstacles to continue to prosper.

In 1913 the entire factory burnt down and in 1929 it was hit with another disastrous fire which destroyed most of the buildings and all its records.

Since then the business has gone from strength to strength. In 1935 it established an affiliation with Kraft, in 1956 both entities purchased the Sungold milk business and in 2002 it established a sales office in Japan.

Last week it also upgraded its earnings outlook, with the business now expected to make a profit of between $47 million and $52 million, approximately double the previous estimate.

WCB has been listed on the ASX since 2004 and is currently trading at $7.18 – up 100% from the beginning of the year.

But what makes this business so appealing to Saputo and Bega? IBISWorld senior industry analyst Emily Witham told SmartCompany the promise lies in WCB’s established exporting networks.

“Exports for dairy processors in particular make up a large component of their business at the moment and it’s likely to continue to do so. The exporting market is huge in cheese, skim milk and milk powder, particularly as the popularity for these products grow throughout Asia,” she says.

“That’s been one of the main aspects of the takeover; it will allow a business like Saputo to get a foot in the Asian market, which is a big area for growth.”

Dairy Australia industry analyst John Droppert agreed, telling SmartCompany dairy processors with exporting links are currently leading the market.

“Historically it’s been a balancing between exporting opportunities and a profitable business at home to balance out the fluctuations,” he says.

“At the moment there is tremendous growth in South East Asia and this year the export story is very strong. There have been a few tough years for many of the key exporters, but there have been supply shortages in China this year and there have been exits among the smaller producers there, which is driving up commodity prices to levels we haven’t seen very often.”

According to IBISWorld, 40% of the cheese produced by WCB is exported to Japan, Korea, the United States, Europe and South East Asia.

The majority of the whey protein concentrate it produces is also exported to Japan and the US, while its butter and milk powder products are also exported through these destinations and the Middle East, China, Russia and South America.

The Warrnambool Cheese and Butter Factory also won the top exporter award in 2012 at the Governor of Victoria Export Awards.

But Droppert says it’s not just its exporting division which is attractive to Bega and Saputo.

“A successful dairy processor must have a good supply base and relations with farmers. It’s easy for farmers to switch between processors,” he says.

“It also needs efficient processing and good connections with the markets.”

The ongoing strength of the business is, however, likely to be driven by its exporting division.

“IBISWorld has found the big drivers in Asia is the westernisation of diets including a lot more lactose-based products, the growing population and the rise of middle income earners,” Witham says.

Witham says Asia’s dairy producing capabilities aren’t sufficient to meet the growing demand.

“Warrnambool has set themselves up to penetrate the market successfully and it produces a wide range of products designed for a niche market which aren’t sold at a significant premium,” she says.

“They’re sold at a mid-tier level, but are of a high quality.”


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