Food and beverage company Lion has said it has no current intention to sell its share in Victorian dairy company Warrnambool Cheese and Butter (WCB) to Canadian dairy company Saputo, after Saputo gained a majority share in WCB last week.

Meanwhile, Saputo’s rival in the battle for WCB, dairy co-operative Murray Goulburn, has announced that it will withdraw its bid for WCB and sell its share of WCB to Saputo.

The Lion sleeps

The announcement from Lion that it does not currently intend to sell its shareholding in WCB to Saputo has sparked speculation over whether Lion’s value propositions for selling or retaining its shareholding in WCB.

If Lion were to sell its share of WCB to Saputo, Saputo would reach the 90.1 per cent share mark, which would enable it to compulsorily acquire outstanding shares and make WCB fully-owned. This would also mean accepting WCB shareholders get the final increase in the Saputo offer price to $9.60 per share.

But the ongoing trading relationship that Lion has with WCB may be more important to Lion than any gain from selling its WCB shares. Lion acquired a 9.99 per cent shareholding in WCB in November 2013, saying it “had enjoyed a close relationship with WCB over many years” and that WCB played an important role in Lion’s cheese business. Lion said it considered its stake a “continuation and strengthening of this relationship”.

As previously noted by Australian Food News, WCB  manufactures cheese for Lion for Lion’s well-known Australian brands such as Coon and Cracker Barrel.

Given the mounting  speculation about Lion’s dairy business being available for acquisition (its dairy brands include Pura, Dairy Farmers, Farmers Union, Dare, Coon, Yoplait and Fruche) its Japanese owner Kirin Holdings would want to preserve the value of the Lion business and not devalue it through the loss of a profitable aspect of its current operations.

What view of the rumours?

Rumours of Kirin putting up Lion Foods dairy division in Australia for sale may have eased since August 2013 when Moody’s Japan K.K. revised Kirin Holdings Company’s outlook to stable from negative and affirmed all of its existing ratings, including the A3 long term issuer rating.

The change in outlook was prompted by Kirin’s debt repayment with proceeds from asset sales and growth of its international businesses that offset the weakness of its domestic business. The negative outlook was put in place due to concerns on Kirin’s expansion into Brazil where it had limited business expertise, through a debt-funded acquisition that increased leverage in late 2011.

According to rating agency Moody’s Japan, Kirin’s A3 rating reflected its competitive position in beers, soft drinks and dairy products in Japan and Australia, its well-diversified product and business portfolios (including a small but highly profitable pharmaceuticals business), its healthy liquidity, and its commitment to reduce debt leverage as evidenced by the recent repayment of debt with proceeds from asset sales. At the same time, the rating is constrained by Kirin’s still-high geographic concentration in the competitive and mature domestic market and limited growth prospects of the domestic beer Japanese market, which is Kirin’s largest business.

About half of revenues come from Kirin’s domestic beverage business, 30 per cent from its international beverage business, and the remainder from the pharmaceuticals business (of which nearly 80 per cent of the Business is domestic).

While still predominantly domestic, Kirin has been increasingly diversifying geographically through its businesses in Australia and Brazil. Further, similar to many Japanese corporates, Kirin’s margins are thin compared to globally rated peers.

Nonetheless, the reported view that the Lion dairy brands in Australia will be on the market still persist. Would Bega Cheese or Murray Goulburn be very interested? Probably. Would Fonterra oppose an acquisition by those two?  Yes. With so many vested interests at stake, it would require lots of spilt milk and some intricate unravelling of  eggs in an omelette to sort out a few Australian dairy industry interlocking complexities, but that does not mean it cannot happen.

Murray Goulburn pulls out of the race

Meanwhile, rival bidder to Saputo in the battle for WCB, Murray Goulburn, has announced that as a result of Saputo acquiring a controlling interest in WCB, Murray Goulburn will seek the consent of the Australian Securities and Investments Commission (ASIC) to withdraw its bid for WCB, and has withdrawn its authorisation application to the Australian Competition Tribunal (ACT).

Murray Goulburn said it also intended to accept Saputo’s offer, which is anticipated to take Saputo’s relevant interest above 75 per cent of WCB, triggering an increase in the offer consideration to at least $9.40 per share. In accepting the Saputo offer, Murray Goulburn said it will receive at least $92.9 million of cash proceeds, which would result in an extraordinary gain on investment before tax and costs of approximately $51 million.

“The sale of our WCB shareholding represents an excellent financial outcome for our co-operative,” said Gary Helou, Murray Goulburn’s Managing Director. “These cash proceeds will support our plants to reinvest in our business and to grow market share in Australia and expanding internationally, further assisting us to deliver our goal of increasing the underlying farmgate returns,” he said.

Murray Goulburn said that throughout the process it had remained committed to acquring WCB and was confident it had a “compelling case to obtain authorisation from the ACT”. However, in light of Saputo acquiring a controlling interest in WCB, Murray Goulburn said it had an obligation to its shareholders to “maximise the financial outcome and focus management time on growing a strong and globally competitive co-operative”.

Murray Goulburn said it considered it a “lost opportunity for the Australian dairy industry” that Saputo received Foreign Investment Review Board (FIRB) approval in a significantly shorter timeframe than the process Murray Goulburn was required to follow. Murray Goulburn said that from the point that Saputo was granted FIRB approval, the Murray Goulburn offer was not capable of being acted on by WCB shareholders in the same time period. Consequently, Murray Goulburn said it was “not able to compete realistically on a level playing field” with the competing international bidder.

Values offered for WCB highlight value of Australian dairy

Murray Goulburn said the values that were eventually offered for WCB highlight the “outstanding opportunity” for Australian dairy industry growth into the future.

Murray Goulburn said it processes over three times the milk volumes of WCB and that the WCB auction “demonstrated the strategic value of Australian dairy businesses like Murray Goulburn”.

“As a farmer controlled co-operative we have a vision to create a significant Australian owned globally relevant dairy business,” Mr Helou said. “There is a significant opportunity for us to capture the global opportunity and deliver its upside to Australian farmers and their rural communities – ultimately the only way the industry will be able to arrest the decline in production we have experienced over the last 10 years,” he said.