Finance Finance News Why everyone wants a slice of Warrnambool Cheese and Butter

Why everyone wants a slice of Warrnambool Cheese and Butter

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Most cheese-loving Australians will be familiar with the brands Coon and Cracker Barrel.

What they might not know is the identity of the company that processes two of Australia’s most popular brands or the Japanese food and beverage giant that owns them.

Warrnambool Cheese and Butter is the processor. Kirin Corporation, through its sprawling Lion consumer products group, is the owner.

But that’s just a small slice of a much bigger story.

Warrnambool, Australia’s oldest and fourth-largest dairy processor, has become an acquisition target in the boardrooms of Tokyo, Montreal, Melbourne and the relative urban minnow of Bega on the NSW far south coast.

They’re all after one thing: a bigger stake in the fastest-growing market for dairy products in the world.

In south and north Asia, the consumption of milk and milk products is expected to increase by 125 per cent by 2030.

Demand there is growing with rising incomes, population growth, urbanisation and westernisation of diets amongst its middle classes.

The trend is most pronounced in highly-populated countries such as China, Indonesia and Vietnam.

In 2011, Asia accounted for 34 per cent of all dairy imports globally.

The reason why is a simple case of supply and demand. The countries with the highest milk surpluses are New Zealand, the United States, Germany, France, Australia and Ireland.

The country with the highest milk deficit is China and Indonesia is not far behind.

China is actually the fifth largest milk producer in the world but its output can’t keep up with local demand.

Australia, unlike its Trans-Tasman neighbour, has been slow to take advantage of Asia’s burgeoning demand for milk products.

Size, and with it efficient capacity, until now have been the impediments limiting the ability of Australian processors to grow their $2 billion share of the market.

New Zealand exports more than that to China alone as part of its $5.6 billion take in Asia.

Not one Australian processor is rated in the world’s top 20, yet across the ditch, New Zealand’s Fonterra is the world’s largest.

That it processes just three per cent of total global output is down to the fragmented and small-scale nature of milk processing. The top 20 processors in the world have a combined output that amounts to less than a quarter of global production.

Getting bigger means merging with or acquiring other processors.

Which brings us back to Warrnambool and why a relatively tiny, by global standards, processor is being wooed by both overseas and local interests.

Geography has a bit to do with it. Australia, as the 14th largest milk producer in the world, is well located to service the Asian market.

Our relatively low cost of production also has appeal, especially against two of the biggest surplus producers in the world – the US and the European Union.

The Montreal-based Canadian dairy company Saputo knows that Europe is no place from where to grab a share of the growing Asian market, having decided to close down its facilities in the United Kingdom and Germany.

Instead, it has invested heavily elsewhere making 22 acquisitions – including Argentina – worth $US4.2 billion since listing in 1997.

It wants Warrnambool to be its entry vehicle into the Australian market and, through it, Asia.

“We believe this would be an ideal platform for us to have in Australia,” CEO Lino Saputo told the Australian Financial Review this week during a visit to Australia to talk to Warrnambool suppliers.

He is telling them about the company’s experience in Argentina, where milk production expanded from 400 million litres to one billion litres post acquisition.

Saputo intends to do the same with Warrnambool.

His company’s $8-a-share cash offer is the highest on the table following earlier bids by Bega Cheese ($7) and Murray Goulburn Co-Operative Co ($7.50).

The Saputo bid values Warrnambool at $450 million.

Enter Lion, already a large player in Australia’s dairy sector. This week it snared a blocking stake in Warrnambool, sending the company’s share price to a record high of $9.30.

Not bad for a company that traded as low as $3.45 during the past 12 months.

Lion’s owner Kirin is said to be concerned about the possibility of Saputo’s entry into the Australian dairy sector and wants a say in any carve-up of Warrnambool.

Bega Cheese, another of Australia’s long-established dairy processors and owner of its number one selling cheese brand, wants to maintain the Australian-owned status of Warrnambool.

So too does the Victorian government.

State agriculture minister Peter Walsh thinks regulators should take into consideration that an all-Australian merger would be in the best interests of the dairy industry.

“It would actually be good to see them bulk up into being a powerhouse from a world point of view,” he said.

Bega is the least encumbered bidder for Warrnambool, expecting to receive approval from the competition regulator for a revised offer of its 1.2 shares and $2 in cash for each Warrnambool share.

Murray-Goulburn is seeking authorisation from the Australian Competition Tribunal, bypassing the Australian Competition and Consumer Commission which raised issues with a previous takeover proposal in 2010.

The co-operative also has debt issues to deal with – including the possibility that it may need to reduce milk prices to farmers – as it explores how to fund its bid.

The Saputo bid will require approval from the Foreign Investment Review Board.

The foreign raider also will have to deal with its rivals who, combined, already hold 46 per cent of Warrnambool’s issued capital: Bega (18pc); Murray Goulburn (17.7pc) and Lion (9.9pc).

Whatever the outcome, the immediate winners are the smaller mum-and-dad shareholders of Warrnambool and Bega.

And they should just enjoy the ride, was how one market analyst described the escalating interest in Australia’s dairy processing sector.