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China Dairy Demand Drives Warrnambool Bids Down Under

October 14, 2013

The race to fill Asia’s increasing appetite for dairy foods has made even the worst-performing producer in the region into the target of a bidding war.

Angus Whitley and David Stringer

The race to sate Asia’s increasing appetite for dairy foods has made even the worst-performing producer in the region into the target of a bidding war.

Saputo Inc., Canada’s largest dairy processor, agreed to pay $372 million for Warrnambool Cheese & Butter Factory Co., topping a bid from Bega Cheese Ltd. Warrnambool, which exports most of its produce to nations including China and Japan, is trading above Saputo’s Oct. 8 offer of A$7 a share. That shows some investors expect a higher proposal for Australia’s oldest dairy producer, said Canaccord Genuity Group Inc.

After the slowest profit growth of any Asian peer in the past five years, the 125-year-old company is projected to almost triple earnings this year, according to data compiled by Bloomberg, amid a surge in milk powder prices and record Chinese demand. Bega, Warrnambool’s local rival and its largest shareholder, may be able to raise its bid by squeezing out more cost savings, said RBS Morgans Ltd. Bega needs to boost its offer to A$7.50 a share to win over Warrnambool investors, Canaccord said.

"Dairy, in particular, is benefiting from increased Asian demand," Stephen Scott, head of research at Ord Minnett Group Ltd. in Sydney, said in a phone interview. "There’s not a lot in the listed space left once Warrnambool goes."

Warrnambool, which supplies milk to make Philadelphia cream cheese, is named after the home town of its founders in the state of Victoria. Warrnambool now relies on exports for most of its sales and last year made 143,000 metric tons of dairy produce including cheese, milk powder and infant-formula ingredients.

‘Dramatic Improvement’

Even after posting its lowest profit since 2009, Warrnambool is attracting bids just as the dairy-exports cycle emerges from a trough, Chief Executive Officer David Lord said in a phone interview. Poor weather in the world’s main milk- producing regions has dented supply, driving up prices, he said.

"We’re seeing a dramatic improvement in market conditions," he said. "We’re seeing a rise in demand out of China. The difference between what they can produce for themselves and what they need is becoming wider."

Lord said it was "possible" that Warrnambool’s stock price reflected investors’ expectations of a higher bid.

China, the world’s most populous nation, is setting new records for milk-powder imports, and demand for produce in India is outstripping local production, Warrnambool said in an Oct. 9 filing. This year, the price of exported milk powder will surge 33 percent, butter will rise 16 percent and cheese will climb 12 percent, the company said.

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