What will Bega Cheese buy next?

06 Jul, 2017 12:00 PM
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David Williams: We’re pretty confident about where Bega’s sitting with the market right now, but things are always happening and it’s good to be able to respond quickly.
But we want to have some firepower to do something if something comes up.
David Williams: We’re pretty confident about where Bega’s sitting with the market right now, but things are always happening and it’s good to be able to respond quickly.

There's speculation aplenty about asset changes and structural revamps in the dairy industry, including questions about what Bega Cheese is up to.

Supportive investors are pumping an extra $160 million into its bank account and the share price is climbing, but Bega Cheese says it has no plans for another spending spree – at the moment.

Amid speculation about potential asset changes and structural revamps by some major dairy industry players in Australia, Bega launched last week’s capital raising saying it wanted to be prepared to take advantage of future food and dairy growth opportunities.

No specific opportunities are on the radar according to the company’s investment sector advisor, David Williams at Kidder Williams.

“But we want to have some firepower to do something if something comes up,” Mr Williams said.

“We’re pretty confident about where Bega’s sitting with the market right now, but things are always happening and it’s good to be able to respond quickly.”

Institutional shareholders have strongly backed the company’s plans to trim its debt-to-equity gearing to 30 per cent and enhance its acquisition flexibility, over-subscribing the first stage of the capital raising offer.

For the time being, Bega – Australia’s biggest brand name in cheese – still has a lot on its plate as it formally takes ownership of Vegemite and a host of other Kraft branded spreads, dressings and cheese product lines acquired in a hefty $460 million deal with US food giant, Mondelez, in January.

Lion dairy speculation

However, recent speculation surrounding national dairy business Lion Dairy and Drinks, has its parent company, the Japanese brewing and beverage giant, Kirin, weighing up the future for its milk processing assets in Australia.

Kirin has apparently been quietly testing the market appetite for Lion’s operations which span the Dairy Farmers, Farmers Union, King Island, Yoplait, Dare and Pura brands.

Lion, Australia’s second biggest milk processor, with farmer suppliers in all states, will not comment on the rumours, while Mr Williams doubted there was much substance to the speculation.

Bega and NZ’s farmer-owned Fonterra are also expected to be closely watching the Murray Goulburn (MG) co-operative’s current restructure moves, including its planned closure of three factories in Victoria and Tasmania.

Other assets may also be up for grabs after a major review of the troubled co-op’s operations and capital structure is completed by recently appointed managing director, Ari Mervis and chairman, John Spark.

Murray Goulburn opportunities

“But I have to be careful about speculating because we’re an ASX listed company,” he said.

Bega’s past investment plays have included an unsuccessful takeover bid for Warrnambool Cheese and Butter in 2013-14, which eventually yielded a $44 million profit after selling its 19 per cent stake to Canada’s Saputo Inc; $39 million invested in Tatura Milk Industries in northern Victoria in 2007 followed by another $35 million to buy the business in 2011; the 2008 purchase of Kraft’s Strathmerton cheese plant in Victoria; a 20-year Canberra joint venture with Lion, Capitol Chilled Foods, and previous shareholdings in NSW’s United Dairies (later part of Lion) and UHT soy drink processing in Sydney.

“We always stand ready for any opportunities,” Mr Irvin said when asked about potential advantages to both Bega and MG if the NSW South Coast dairy company were able to share its processing management and farmer trust credentials with the big Victorian co-op.

“Murray Goulburn has to make decisions that it sees as right for its business," he said.

"I certainly don’t celebrate if businesses are struggling, even competitors, because we’re all improved by a healthy business environment.

Although MG is part-owned by an external shareholder trust, which allows any non-farmer investors a chance to buy a stake in dividend earnings, the trust’s listed units do not entitle shareholders to an equity interest, voting rights, or a say in the co-op’s management.

Investment advisor, Mr Williams believed unless the capital structure changed there was little incentive for a potential partner like Bega to buy MG shares, particularly as the profit-sharing dividends were now suspended.

Stockbroking firm, Bell Potter, has tipped MG will not pay a final dividend to shareholders in 2016-17 or throughout 2017-18.

Although positive about the dairy sector’s prospects, Bell Potter said it was hard to foresee what might happen to the MG trust and its profit sharing mechanism after the review.

Agribusiness supporters

Mr Irvin said while many outside investors saw opportunities and rewards in agribusiness, it was a difficult and slow process to win market confidence.

Many had good reason to be cautious about putting money into the sector – “many have been burnt”, he said.

Bega’s 2011 move from farmer co-op to listed company saw it snubbed by many in the investor sector, despite its careful growth record.

“But after a couple of years of steady results on the table we were able to build confidence and found investor concerns about the volatility of the ag sector changed to recognising there’s something else going on here,” he said.

Shareholders saw the need to support suppliers and encourage productivity, which in turn led to more revenue and returns to shareholders.?

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