An investigation by The Australian has found the 11-member board of the troubled Murray Goulburn knocked back at least five higher-priced bids to buy the major milk processor — the majority from large Chinese companies — when it voted unanimously to accept Saputo’s offer.
Two Chinese dairy mega-corporations, Yili and Mengniu-Cofco, proposed to pay $1.6bn and $1.5bn respectively to buy the embattled dairy co-operative. Yili planned to float the resulting entity on the Australian Securities Exchange with Murray Goulburn dairy farmers to retain a 49 per cent share ownership.
Inner Mongolian Mengniu, new owner of Gippsland’s Burra Foods and partially owned by Chinese state-owned food conglomerate Cofco, offered the $1.5bn to buy all of Murray Goulburn’s 10 processing plants and committed to spend an additional $300m-$400m in the next five years to expand the business.
A consortium of TasAsia Dairy, led by former Australian KPMG executive Brian Ellerbeck and agricultural entrepreneur Stephen Blair and backed with flush funds from China’s fourth-largest pharmaceutical company, Shanghai Pharma, pitched a $1.75bn bid. More than five other confidential bids were received, with the final two-way battle coming down to locally listed Bega Cheese — which decided Murray Goulburn was not worth more than $1.25bn — and Saputo.
Canadian-based Saputo, one of the 10 biggest global dairy companies and a major cheese and milk company in Canada, the US, Argentina and Australia, four years ago won a tight four-way battle to secure Australia’s fourth-largest dairy business, Warrnambool Cheese & Butter, for $533m.
The financially better offers from Yili, Mengniu, China Resources, Bright Foods and Shanghai Pharma appear to have been rejected because MG directors feared they would not have quickly won Foreign Investment Review Board approval or political support from the Turnbull government.
“It’s xenophobia, pure and simple,” said one key player linked to the serious Mengniu bid. “It’s going to be interesting to see how this plays out in the long term; China is getting pretty sick of Australia’s attitude towards Chinese companies legitimately investing in its business assets.” Chinese ownership of key agricultural assets, particularly by state-controlled enterprises, has become a hot political issue in the electorate. Former FIRB chairman Brian Wilson earlier this year warned Chinese investors against bidding for trophy or “icon” farm properties and rural companies in the current political environment. The then deputy prime minister, Nationals leader and agriculture minister Barnaby Joyce, was an open critic of growing Chinese agribusiness investment.
Murray Goulburn managing director Ari Mervis told The Australian the board had looked “holistically” at all bids. The certainty of each deal’s completion and the chance of problems created by delayed FIRB approval, political outrage or competition issues with the Australian Consumer & Competition Commission were key factors.
Mr Mervis would not discuss suggestions that the federal government, through the offices of Mr Joyce, had specifically warned Murray Goulburn against accepting a Chinese buyer, as has been widely claimed within the dairy industry.
“The board assesses each proposal thoroughly, holistically and on its merits,” Mr Mervis said.
“It wasn’t rushed but certainty of funding and completion was important, as was the timing (of the sale) to ensure it was completed to allow Murray Goulburn to pay a (more) competitive milk price to its farmers (as soon as possible) after spring.
“Value was an important criteria but only one of many; it was apparent to all the board the proposal put by Saputo met many of the objectives; they have done a great job since securing WCB and the strength of their balance sheet promises a favourable future.”
Disclosure of the substantially higher secret bids for Murray Goulburn raises questions of why its directors unanimously chose the Saputo offer, and whether they met their obligations to secure the best deal for the co-operative’s 2000 dairy farmer-owners and investors in the languishing hybrid listed trust (MGC).
Mr Mervis, who is also an MG director and board member, said: “We do have a fiduciary duty to come to the best outcome in the interests of our shareholders, employees, customers and unitholders; it’s not about pre-gauging or second-guessing FIRB or ACCC decisions but certainty (of the sale going through) is one of the components.”
There are also claims the sale deal was rushed through — and sprung on surprised farmers late last week — because Murray Goulburn is short of cash flow to allow it to raise the farmgate milk prices it pays its farmers to a level competitive with other processors.
MG has promised to lift its current milk price of $5.20 a kilogram of milk solids — well below Fonterra’s $5.90 a kilogram — to $5.60 a kilogram, backdated to November, if the Saputo sale is approved quickly by MG’s remaining 2000 farmers in a January vote.
Mr Mervis dismissed suggestions of cash-flow strain.
“At the moment it is business as usual,” he said. “We do have access to ($100m) of undrawn bank facilities we can draw on if we need (to keep our milk supply at about 2 billion litres) and give suppliers less reason to leave MG.”
Another losing bidder was New Zealand’s Fonterra, the largest global milk processor in the world, which put together a $2bn proposal to merge the existing $500m Australian manufacturing assets of the New Zealand-owned business with Murray Goulburn’s 10 local processing plants, which it offered to buy for $1.5bn.
The massive, almost-reverse takeover would have created a $2bn co-operative that would have remained in the hands of Australian farmers, retained a co-operative structure and kept the venerable Murray Goulburn name and its Devondale brand alive.
Singapore-based agribusiness trading giant Wilmar offered to buy Murray Goulburn for $1.5bn-$1.6bn, a price also matched by state-owned China food behemoth China Resources Ng Fung, already Murray Goulburn’s second-largest noteholder with a 7 per stake in the ASX-listed trust.
Murray Goulburn’s board surprised its 2000 farmer-owners at its AGM when, instead of presenting them with an update of a strategic review of the company by Deutsche Bank, it was announced the co-operative had been sold via a binding agreement signed just half an hour earlier to Saputo.
Chairman John Spark told Murray Goulburn shareholders the Saputo deal was “the best proposal”.The Australian understands that despite 11 firm bids being made for Murray, only Canada’s Saputo and Australian-listed rival Bega Cheese were allowed full access to Murray Goulburn’s complete financial details and a due diligence process two weeks ago.
Several underbidders have raised questions about why the lower-priced Saputo bid was endorsed over their proposals.
Tight confidentiality clauses prevent bidders from publicly discussing their concerns. But a source involved with the Yili $1.6bn bid said he had been surprised at the directors’ readiness to prejudge possible future decisions that might be made by the Foreign Investment Review Board and the ACCC.
“It seems to have been conducted so some tenders were effectively kept out and no one had the ability to improve on their first bids because due diligence was not open to everyone,” the Yili source said.
“We also don’t think there should be any barrier to Chinese involvement; this is about buying the processing assets of a company, not farmland.”
Fonterra Australia’s managing director, Rene Dedoncker, also confirmed his merger proposal “retained Murray Goulburn’s co-operative ethos” and its ownership by farmers.
“Our proposal to the MG board was based on a merger that provided options for Australian farmers to retain ownership and a strong farmer voice,” Mr Dedoncker said.
Unitholders in MG’s listed trust, which was floated with an original value of $2.20 a unit two years ago to raise almost $500m, are also furious.
They have had to watch as the value of their investment in MGC has shrunk to below 80c a unit, with Saputo now offering to buy out all the unitholders for 75c.
“We have lost two-thirds the value of our shares in the past disastrous 18 months,” says Carlo Caiani, a Melbourne-based investor and corporate adviser.
“And with this rush to seal the Saputo deal by the board, it is virtually akin to writing off our investment.
“It seems to me the board has panicked and sold the company to Saputo for a value below its worth when it could have landed a much higher bid with a bit of patience and preparedness to contemplate some level of Chinese ownership.”