More signs of consolidation amongst Australian dairy producers illustrate how the industry is beginning to turn up, made more attractive and profitable by recent higher international milk prices and weaker Aussie dollar.
Murray Goulburn, Australia's largest dairy co-operative, has a strategic 16% stake in Warrnambool Cheese (ASX: WCB), which has just received a takeover bid from Bega Cheese (ASX: BGA). Bega Cheese also has an 18% stake in Warrnambool Cheese.
The takeover offer is for cash and script — $2 per share plus 1.2 Bega shares. At the time of the offer, Warrnambool Cheese shares rose to almost exactly the estimated takeover value of $5.78 a share.
Warrnambool Cheese management has come out saying it doesn't recommend shareholders take the offer because in its view, Warrnambool has a stronger growth outlook than Bega Cheese. However, the takeover company's share price has recently hit a new yearly high, so the value is temporarily inflated, which makes the takeover offer seemingly more attractive.
Because of Murray Goulburn's sizeable shareholding, if it accepts the offer, it may cause others to follow suit. By accepting the bid and gaining Bega shares through the deal, it would become Bega Cheese's largest shareholder.
Also this month, Murray Goulburn, which is not ASX listed, released its yearly results, happily showing a net profit up double since last year. Revenue was only up 1% to $2.39 billion, so the real reason for dramatic jump in earnings was that in the year before costs associated with a company restructure brought down the earnings, thereby making this year's seem to be a great increase.
Half of its revenues result from international sales, so the recent decline in the Aussie dollar in the last couple months of the financial year was welcome, yet wasn't enough to translate into larger profits. 75% of its exports are heading to Asia, with another 9% going to the Middle East.
It is setting up plans to reduce its operating costs by $100 million, and is now investing $120 million in new processing facilities that will supply Coles supermarkets, owned by Wesfarmers (ASX: WES), through a 10-year contract.
Foolish takeaway
This potential consolidation in the dairy industry indicates that the various companies are sensing that the time has come for the stronger in the group to pick up the less financially fit.
In the face of rising international demand of dairy products, higher sales and better profit margins will be achievable, so takeover companies like Bega Cheese can buy up good assets with strong future earning potential at current price levels.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
