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Saputo Punished in Bidding War for Australian Dairy

Nov. 26 (Bloomberg) -- Saputo Inc.’s sweetened bid for an Australian cheesemaker threatens to erode any cost savings from the takeover, making Canada’s biggest milk processor the third-worst performer among global rivals this year.

Saputo yesterday raised its offer for Warrnambool Cheese & Butter Factory Co. by 2.2 percent to A$515 million ($472 million) on condition it gains a controlling stake. That topped competing bids from Bega Cheese Ltd. and Murray Goulburn Cooperative Co. The Montreal-based company’s total return has fallen 2.2 percent this year, including share and dividend payouts, trailing a 27-percent gain for the world’s 38 largest food manufacturers, including Nestle SA and Unilever NV.

“The target’s price multiples are so high that a purchase might result in very little synergies,” said John Stephenson, a fund manager with First Asset Investment Management Inc. in Toronto, which oversees about C$2.7 billion ($2.56 billion).

The value of yesterday raised offer was 44.13 times earnings before interest and tax, compared with 20.57 times for the peer median, according to data compiled by Bloomberg.

Even with the recent underperformance, Saputo’s stock is still trading “well above its historical level,” Stephenson said, most recently at 18.27 times earnings. “There’s nothing to be excited about the name in the near term.”

Saputo was little changed at C$48.58 for a market value of C$9.45 billion at 10:02 a.m. in Toronto today.

Saputo’s A$9.20-a-share offer is more than double the stock’s average price in the 20 days before bidding started, according to Bloomberg data. That’s a record premium for a takeover of a food company in Asia with a market value of more than $200 million, the data show.

Growing Demand

Global demand for dairy products has grown more than 7 percent over the past decade to $436 billion, led by rising consumption in China, resulting in a scramble by international companies to expand in the region. Saputo entered a three-way bidding war for Warrnambool, whose shares have more than doubled since Bega, its largest shareholder, made an initial offer on Sept. 12.

The industry’s pace of expansion will likely continue over the next decade as the middle class grows in emerging Asian markets and adds more meat and dairy to their diets, said Bloomberg Industries analyst Kenneth Shea.

Acquiring an Australian business would also allow Saputo to benefit from higher international milk prices, unlike in Canada and the U.S. where prices are dictated by domestic conditions, said Chief Executive Officer Lino Saputo during a Nov. 7 conference call with analysts.

Dairy Prices

“As always, our goal remains to pursue growth and continue to work towards developing new markets within the growing global dairy industry,” Saputo said at the time. Sandy Vassiadis, a spokeswoman for Saputo, didn’t respond to messages yesterday seeking comment.

Global dairy prices are 25 percent higher than in October 2012, the United Nations Rome-based Food & Agriculture Organization said in a Nov. 7 report. Prices received by dairy farmers in New Zealand, home to Fonterra Cooperative Group Ltd., the world’s largest milk exporter, surged a record 54 percent in the third quarter compared to the year-earlier period, the country’s statistics office said Nov. 20.

Saputo has made 15 acquisitions in the past decade, including the purchase of Dallas-based Morningstar Foods LLC for $1.45 billion in January. All but two of the transactions before the Warrnambool bid were North American targets.

The company’s overseas operations include Germany’s Spezialitaten-Kaserei De Lucia GmbH, a maker of specialty Italian cheese based in Heiden near the Dutch border, and Argentina’s Molfino Hermanos SA, the South American nation’s third-largest dairy producer.

Smart Buyers

“These guys are very intelligent acquirers,” said Izabel Flis, an analyst at Franklin Bissett in Calgary. “Even if they did overpay for Warrnambool, we’re not necessarily taking into account the potential of what this company can generate in the future given the emerging-markets growth for dairy demand, and given what Saputo could do with these assets.”

If the Australian deal is completed, Saputo may be able to boost the return on invested capital at the Australian dairy operator. Saputo’s three-year average return on invested capital of 15.5 percent leads the industry’s largest companies, and is almost twice that of the group’s 8 percent median, according to Bloomberg Industry’s Shea. That compares with Warrnambool’s 6.6 percent.

“The dairy market is consolidating and will continue to do so,” said Shea. “Larger companies tend to have higher returns because of economies of scale.”

Lackluster Results

The 10 largest dairy suppliers, which don’t include Saputo, have boosted their share of the global market to 23.6 percent last year from 14.4 percent in 2003, according to Euromonitor data compiled by Bloomberg Industries.

Part of Saputo’s share decline is related to “fairly lackluster results” this year, said Flis.

Net income in the three months ended Sept. 30 rose 2.8 percent to C$133.3 million, the company said in a Nov. 7 statement. Adjusted earnings per share have missed estimates in seven of the past eight quarters, according to Bloomberg data.

The recent decline in Saputo’s share price has offered a buying opportunity, said Greg Dean, who helps manage a C$9 billion portfolio for CI Investment’s Cambridge Global Asset Management, which also owns shares in Saputo.

“Saputo has been on my buy list for 2 1/2 years and it was only in the last three months that we were able to become shareholders,” he said in a phone interview. “I couldn’t get comfortable with the valuation. It’s a stock that got ahead of itself valuation-wise.”

Red Flags

Saputo’s share performance this year is a result in part of the stock’s appreciation over the past two years, said Vijay Viswanathan, director of research at Mawer Investment Management Ltd. in Calgary, which owns Saputo stock as part of the C$18.5 billion in assets it oversees.

“We like the management team -- they have been excellent,” said Viswanathan. “What would give us pause would be if we saw a deterioration on the operations side. If we saw they were starting to overpay significantly for assets.”

“There is nothing in the recent results that would see as worrisome or red flags,” he said.

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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