After a hotly disputed three-way bidding war, Saputo Inc. is about to get its hands on Australian dairy firm Warrnambool Cheese and Butter Factory Co. But striking a deal in the land of cheap milk comes at a steep price.
Depending on how many shares Saputo secures, the company will pay between $515-million (Australian) and $537-million in cash and assume $75-million in debt, for a total cost of up to $612-million – or close to $590-million (Canadian). That is more than 2-1/2 times what Warrnambool was worth a year ago.
It's not that Saputo can't afford it. The third-largest dairy processor in North America could buy four Warrnambools without a sweat. But this transaction stands in stark contrast with the 22 previous deals the mozzarella giant concluded since it went public in 1997. Saputo is paying close to 24 times Warrnambool's operating share profit for the year ended June 30. In contrast, its own shares trade at under 13 times its trailing 12-month earnings.
While chief executive officer and vice-chairman Lino Saputo Jr. and his father, Emanuele (Lino) Saputo, don't have any qualms about buying the most expensive Italian cars, they have never been spendthrifts when Saputo is shopping around for companies. So what gives?
There is Warrnambool, a great producer in and of itself. And then there is what Saputo can do once it lands the oldest dairy producer in Australia – and therein lies the real attraction.
Saputo, as it already is clear, has maxed out its possibilities in Canada, a country whose tightly regulated dairy market has been killing almost all export prospects. So, ever since Lino Saputo Jr. succeeded his father, the Montreal-based producer has been looking out to the world.
Australia is one of the rare countries with a deregulated market that produces cheap fresh milk on a large scale. Raw milk accounts for 85 per cent of Saputo's operating costs. This makes Australia the perfect springboard for Asia, a continent that is increasingly hungry for pizzas and protein-rich products.
Within Australia, Warrnambool is a sophisticated dairy processor that has embraced the nutraceutical revolution; using advanced technological processes, natural compounds offering health benefits are extracted from milk.
Right beside its cheese manufacturing facilities in Allansford, the Victoria-based company is about to open a lactoferrin plant, for example. This protein exhibits antibacterial, antioxidant and antiviral properties and is believed to boost the immune system. It is also nicknamed "white gold": Health supplement and pharmaceuticals companies pay up to $1,000 a kilogram for the lactoferrin they add to sports drinks, baby formula and supplements.
Warrnambool hopes to produce between 16 and 20 tonnes of lactoferrin a year, giving a whole new meaning to the expression "cash cow."
But as lucrative as lactoferrin, instantized whey protein concentrate and other nutraceutics promise to be, they cannot justify the price tag for Warrnambool alone. If Saputo was so keen to win what one Australian newspaper described as the "most intense bidding war in years," it is likely because the Quebec company hopes to build its Asian presence from that base. So you can bet your pricey Warrnambool shares that Saputo will try to acquire more companies in Australia and in neighbouring New Zealand the same way it has been gobbling up American producers in recent years.
There aren't that many obvious candidates, though. And a number of groups, such as New Zealand co-operative Fonterra, are coveting those targets for the same good reasons Saputo is. Chinese producers, namely, are eager to secure dairy products for their own needs as well as restore their name after tainted milk products ruined their reputation.
Moreover, Saputo's Australian rivals, which held significant stakes in Warrnambool, are all the richer now that Saputo has offered the moon for their shares. For instance, Bega Cheese Ltd., which started the takeover battle for Warrnambool and which owned 18.8 per cent of the company, will walk away with a net profit of between $62-million (Australian) and $68-million. This is 2-1/2 times the profit it recorded in its last financial year.
Bega itself could be a target, but the limits on the shares that can be held by a single shareholder of the former co-operative, which now stand at 10 per cent, won't be entirely lifted until 2021.
The real prize may be Lion, a subsidiary of Japanese brewery Kirin Holdings. Its chief executive ruled out a sale of the beer producer's more peripheral dairy activities, even if Lion's cheese market share is five times superior to that of Warrnambool's, according to Ibis World 2013. However, Lion has suffered from a grocery price war. The company also lost an important contract to supply Coles supermarkets with its house-brand milk in populous eastern Australian states.
If Lion comes into play, the four-month battle for Warrnambool will have been mere foreplay.