Chinese investors to interrupt Warrnambool bidding war

This could be good news for owners of Warrnambool shares.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published December 30, 2013 12:15 am AEDT

The battle between Bega Cheese Ltd (ASX: BGA), Australian private cheese-maker Murray Goulburn, and Canadian dairy giant Saputo Inc (TSE: SAP) for Warrnambool Cheese and Butter Factory (ASX: WCB) could be complicated by the late entry of a Chinese food company interested in the business.

According to a report from Business Spectator, Bega has been discussing the potential of selling its 18.7% stake in Warrnambool C&B, after the company decided to let its own takeover offer lapse last week following higher offers from both Saputo and Murray Goulburn.

The bidding war has now entered its fourth month and is currently being led by Saputo's offer of up to $9.60 per share, 10 cents above that offered by Murray Goulburn. The Warrnambool C&B board has declared its preference for the Saputo bid because the Murray Goulburn bid is conditional on a ruling from the Australian Competition Tribunal due in February at the earliest.

But Business Spectator reports that the bidding war could again be turned on its head after news that China's sovereign wealth fund, the China Investment Corporation (CIC), is backing a Chinese food company that is considering bidding for Warrnambool.

Bega chairman Barry Irvin visited China last month to meet companies interested in investing in Australia's food and dairy assets. Bega is interested in offloading its stake in Warrnambool C&B after its 105% rise in value since September 12.

A Chinese bid could be for as much as $10 per share, which may be enough for Bega to offload it's 18.7% stake. Kirin Holdings (TYO: 2503) could offload its 9.99% stake and Murray Goulburn its 17.7% stake, if it cannot raise its own bid. The combined 46% shareholding would give the Chinese company the largest stake in Warrnambool C&B.

In further positive news for investors in Warrnambool C&B, the company expects to double earnings compared with the same period a year earlier. Earnings before interest, tax, depreciation and amortisation are expected at $58.6 million in the six-months to December 31.

Warrnambool C&B shares rose 2 cents to $9.27 on Friday in very light trade.

Foolish takeaway

Investors holding Warrnambool C&B have received a great return in a short period of time, however bidding wars such as this are the exception instead of the norm. Foolish investors should not invest in companies based on the prospect of a bidding war to generate returns. Instead, companies with sustainable competitive advantages, a history of strong returns and quality management should be favoured for big long-term returns. Companies with these qualities should naturally be takeover targets anyway.

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