Australian Competition and Consumer Commission chairman Rod Sims says he would have “serious problems” with the current structure of the $1.3 billion takeover offer by Montreal-based Saputo for distressed rival Murray Goulburn.
The competition regulator flagged concerns on Thursday, specifically the impact the acquisition would have on competition for farmers’ raw milk in western Victoria if Saputo, which owns Warrnambool Cheese & Butter, ended up owning Murray Goulburn’s Koroit dairy plant.
Mr Sims told The Australian Financial Review he has not had any contact with Saputo since the ACCC released its statement of issues on Thursday, which highlighted Saputo owning two of the biggest players in the region if the deal were to move ahead under the current structure.
“We have looked at all geographic markets and product markets and our view is that this deal may go ahead, provided the Koroit plant is not part of the deal,” Mr Sims said.
The plant at Koroit is Murray Goulburn’s largest and is currently running at well below capacity, which has led to redundancies. The dairy plants have high fixed costs and significant economies of scale, exacerbating Murray Goulburn’s challenges as it tries to stem the loss of milk supply following a disastrous decision two years ago to retrospectively cut milk prices to farmers.
Saputo has grown to become one of the world’s top 10 dairy processors and is well versed in the Australian takeover landscape after winning a three-way fight, which included Murray Goulburn, for Australia’s fourth-largest milk processor Warrnambool Cheese & Butter in 2014.
“Warrnambool has one plant themselves and then they will have the one right next door,” Mr Sims said.
“These are the two biggest players. Everyone knew we would focus on this. It’s a huge transaction and Murray Goulburn has numerous sites. (Saputo) just would not get the plant right next to theirs.”
Saputo said it would review the ACCC’s preliminary decision and continue to work closely with Murray Goulburn and the ACCC with a view to securing ACCC approval as soon as practicable.
The proposed acquisition represents a major structural change in the region given the pair are each other’s closest competitors.
Saputo’s Allansford plant and Murray Goulburn’s Koroit plant would have over two-thirds of the raw milk processing capacity in the south-west Victoria and south-east South Australia region and would acquire the majority of raw milk from dairy farmers in the area.
“Our view is that Saputo owning the Koroit plant would substantially lessen competition for the acquisition of dairy farmers’ raw milk in the region,” Mr Sims said.
Fonterra is the only other major competitor with a processing plant in the region. There are a number of smaller processors and acquirers including The Union Dairy Company (backed by The Midfield Group and global agricultural merchant Louis Dreyfus), Beston, Bega, Australian Dairy Farmers Corporation and Australian Consolidated Milk.
The ACCC’s concerns are that Saputo and Fonterra would be more likely to offer lower prices to farmers if Saputo acquired Koroit, and that there would be very limited alternatives for many farmers.
The red light was not completely unexpected given the ACCC knocked back Murray Goulburn’s bid for Warrnambool in 2010.
If the plant were to be put up for sale sources said several parties may be interested including Bega Cheese, Burra Foods and Australian Consolidated Milk. Chinese players could also be interested after missing out in the prior auction.
“The ball is on their side of the net now,” Mr Sims added. “This is tried and true territory before.”
Saputo chief executive Lino Saputo Jr – whose family founded the company in 1954 – has been talking directly to the ACCC about the deal since the night before it was announced last October. He previously stated the ACCC may not require the sell-off of a significant processing asset to give the acquisition a tick of approval.
Murray Goulburn said the successful completion of the asset sale remains its primary focus and it is working with Saputo and the ACCC to be able to achieve completion.
“Murray Goulburn believes that a successful transaction with Saputo is the best outcome for MG’s stakeholders and we have received support from suppliers and shareholders regarding the security and certainty this transaction will deliver,” it said.
Sources close to Murray Goulburn said the group was considering its position but that customers, suppliers and staff did not like prolonged uncertainty, and it therefore hoped to resolve the issue as quickly as possible.
The dairy processor has lost the mantle as the nation’s biggest milk processor, reporting last month that its milk intake was down nearly 30 per cent to 1.1 billion litres in the six months to December 31. Revenue fell $1.1 billion, down 5.1 per cent.
It warned that if the Saputo deal failed, the group’s uncompetitive milk price may lead to further milk losses, trigger impairments and covenant breaches and the potential loss of creditors’ support.
The ACCC is seeking responses from interested parties by March 13 before making its final decision on March 29.
Local dairy farmer and Moyne Shire councillor Daniel Meade said the ACCC intervention created more uncertainty for Koroit and surrounding communities.
“The people I speak to within the community seemed happy enough and confident enough in Saputo for that deal to go ahead and secure the future of the Koroit plant, their dairy supply and the jobs at the plant,” he said.
“They (Saputo) have come out of the downturn well and managed their dairy farmers well. MG suppliers were happy enough for Saputo to take over Koroit.”
By: Carrie LaFrenz, Brad Thompson
Source: The Australian Financial Review