BGA offer to buy WCB

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

19 September 2013, 9:48 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

The Warrnambool Cheese (WCB) Board has told its shareholders to take no action in relation to the Bega Cheese (BGA) offer. WCB is currently reviewing BGA's offer with its advisers. The WCB Directors said that it will assess whether BGA’s offer adequately reflects the value of the WCB business today, the expected future earnings uplift from its business improvement initiatives currently underway and the improving market conditions (higher USD dairy prices, lower AUD, better season).

Further details on the Board's view and recommendation on BGA's offer will be included in its Target Statement which should be released in mid-October.

Our view

We believe that the WCB Board is pushing for a higher offer. Its statement suggests that BGA's offer does not fully consider WCB's improved earnings profile in FY14 and its many high margin growth projects on the go.

WCB is currently trading at a discount to the BGA offer. We are therefore buyers of WCB as a cheaper entry point into BGA. Investors could also benefit from any increase to the current offer or an alternative offer from another party. We view the combined group (BGA/WCB) positively and expect it to be a core mid-cap holding. It will be a large, liquid dairy company exposed to attractive industry fundamentals. Over time, we would expect that the combined group should be included in the ASX200. 

In our view, BGA’s corporate appeal would increase substantially if it acquired WCB as it would then have a larger presence in the export market. A significant presence in the export market is attractive for anyone wanting to secure dairy supply. In the future, we expect to see strong offshore interest (particularly from Asia) in the Australian dairy sector for this reason.

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