Saputo's offer for Warrnambool leaves door open for better bid

By Jane Wardell

SYDNEY (Reuters) - Saputo Inc's failure to deliver a knockout offer in the three-way battle to take over Australia's oldest dairy company is leaving the door open for a better bid.

The target Warrnambool Cheese and Butter Factory Co surged to a record A$9.39 in Sydney trading on Monday, fuelled by market speculation that the months-long takeover battle has further to run.

The dairy company has doubled in value since Bega Cheese Ltd , its biggest shareholder, made the first takeover approach in September. Some analysts say the sector risks becoming overvalued.

Warrnambool now has a market value of around A$520 million ($490 million), surpassing Saputo's latest A$505 million, or A$9 per share, offer made late Friday. That matched the A$9 per share bid by Murray Goulburn Co-operative Ltd, though that offer is still pending approval from regulators.

Bega Cheese Ltd's most recent offer of A$2 cash and 1.5 Bega shares per Warrnambool share puts its bid at A$9.22 per share currently.

"There's some level of anticipation there might continue to be a bidding war between the three companies," said Steven Daghlian, market analyst at Commonwealth Securities.

Murray Goulburn Managing Director Gary Helou told the Australian Financial Review that his company was considering lifting its bid, but did not specify how high.

Analysts warn that Murray Goulburn, which has a 17 percent stake in Warrnambool, will need to take its offer beyond A$10 per share to have any hope of winning approval from the Warrnambool board, which has thrown its weight behind Saputo's offer.

"Price wise it's looking high, even at the beginning, Murray Goulburn was always looked at as an unlikely bidder because of their debt levels," said Shannon Rivkin, director at Rivkin Securities.

Murray Goulburn is now invoking rarely used laws to bypass the usual regulator, the Australian Competition and Consumer Commission (ACCC), to go the Australian Competition Tribunal.

Murray Goulburn dropped a A$180 million bid for Warrnambool in 2010 after the ACCC expressed concerns about reduced competition for milk supplies.

It is due to lodge its application with the tribunal in November.

Bega said on Monday it did not plan to lift its latest bid, though it would hold meetings with Warrnambool shareholders on Tuesday and Wednesday. Bega has already secured ACCC approval.

Bega's part-cash, part-equity offer puts its bid at A$9.22 per share, but at the mercy of the market. Warrnambool argues that Bega shares are overvalued, fuelled by speculation and its 18 percent stake in Warrnambool.

Warrnambool and Bega could not be immediately reached for comment, while Saputo and Murray Goulburn declined to comment.

OVERVALUED?

There are also concerns Warrnambool itself has become overvalued amid the bidding frenzy. Bid levels have jumped quickly since Bega made an offer of A$319 million in September.

Canada's Saputo, Murray Goulburn and Bega are in a race to lock in a major supplier to the rapidly growing dairy market in Asia. The Chinese dairy import market has expanded to around $4 billion currently from $400 million 10 years ago.

Murray Goulburn's Helou dismissed suggestions the winner could end up paying too much for Warrnambool, saying the market was looking at the strategic value of the sector and the gap between supply and demand in Asia.

Warrnambool is attractive for both its basic dairy produce - it churns out around 800 million litres of milk a year via its shareholder farms - and infrastructure that includes a high-tech plant producing value-added milk extracts.

The extracts, known as nutraceuticals, are a core element in health-promoting products from premium infant formula to bone supplements. The nutraceuticals market in the Asia-Pacific is set to be worth $80 billion by 2017 as Asia becomes more affluent and diets change.

(Editing by Ryan Woo)

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