let the games begin

The rise, fall and rise of WCB

http://www.standard.net.au/news/local/news/general/the-rise-fall-and-rise-of-wcb/2170073.aspx?storypage=0

STEVE HYNES

21 May, 2011 04:00 AM
THE Warrnambool Cheese and Butter (WCB) share price headed north this week as removal of the 15 per cent ownership cap approaches.

Trading hit a high of $4.90 on Monday and stayed above $4.80 all week, up from the $4.55 to $4.60 range a week earlier, as speculation grows about what will happen when the cap is lifted next Thursday.

From that day, WCB will be open to the full force of market competition. To put it bluntly, the company will be up for grabs by anyone prepared to stump up enough cash.

Chief executive David Lord has had this date looming large in his diary since taking on his role in June last year. He took over following a run of rejected takeover bids and knows that interest in the company has not evaporated.

He addressed this matter when The Standard first spoke to him on his appointment.

"The most important thing we can do is to improve our performance to the point where our share price reflects the true value of the business," said the former chief of Parmalat Australia.

If the share price reflects the company's true worth, Mr Lord believes it will no longer look attractive to opportunistic predators. In late 2009, before Mr Lord's time, the company did look like an attractive takeover target and it became the object of some unwanted attention.

It looked like a bargain at that time; to understand why we need to take a brief excursion into WCB's recent history.

In early 2009, WCB was in dire straits. It had pursued a spectacularly unsuccessful capital raising escapade to fund a joint venture with National Foods. It lost nearly $20 million in the process, posting the first loss in its history. It was left carrying underlying debt of $84.7 million, up from $42 million the previous year, and the share price sunk to a low of $1.64 on June 30 - seven months earlier it had been above $4.80.

But things had moved on by late 2009. The management had been purged and the company was on track to a profitable year under the steerage of John McLean, who had come out of retirement to get things back on track.

Importantly, the strategic value of the company, with 600 or so suppliers in Australia's most reliable dairying region, was still intact. To the casual observer, looking only at the previous year's performance, WCB might have looked like a basket case, but to those in the know it was one of the industry's jewels. Yet it was still fragile and just possibly available for a bargain price, with its share price still hovering around a low $1.80.

Two companies tried their luck - Canadian processing giant Saputo and Australian-owned Murray Goulburn Co-operative each made bids of close to $4.00 per share.

The WCB board rejected both bids without reference to shareholders on the basis that they were "opportunistic and did not reflect the strategic value of the company".

Saputo left it at that, but Murray Goulburn persisted, upping its offer twice, with both offers again rejected. It eventually acquired what was then the maximum holding of 10 per cent through the open market, paying around $4.50 per share.

Driven by the speculation, the share price remained above $4.00 for a couple of months but came off the boil when Murray Goulburn's acquisition was over.

When Mr Lord took over, the company was on its way to a profit of $8.8 million for the 2009/10 year and shares were trading at around $3.30 - still a long way below what Murray Goulburn had been prepared to pay.

The ace in Mr Lord's hand was tabled in November with a share issue that brought in $36.7 million in new capital and gave NSW processor Bega Cheese a 15 per cent stake in the company. Bega paid $22.6 million for its stake and a further $14.1 million was raised through a share entitlement issue to shareholders.

The share price immediately responded, lifting to $3.30 and strengthening to $4.60 at the end of February. It had settled in the $4.50 to $4.60 range in recent weeks before this week's upward run.

The injection of revenue has allowed WCB to draw down some of its debt and provided funds for expansion and upgrade projects.

"Along with reducing borrowings significantly, WCB has applied the funds raised to valuable business improvement projects," Mr Lord said.

These include a technology upgrade to the powder plant, a capacity upgrade for the Sungold milk plant and a capacity upgrade for the Mil Lel cheese plant to accommodate a new supply contract and the Warrnambool-branded cheese range.

"More than $10 million will be spent on these projects over 2011/12," Mr Lord said.

WCB is now operating with less than $20 million debt, down from a peak of about $100 million.

The Ocean Road Ingredients joint venture with Dutch company Friesland Foods Domo is about to complete its first year as a fully commissioned operation. It manufactures infant formula ingredients in a separate plant at the Allansford site.

"It's a strong contributor to our revenue," Mr Lord said.

A development that should further strengthen WCB's position was Bega's announcement this month that it, too, will become a public company. The float is tipped to raise about $375 million, which should provide WCB with another line of revenue. So, is the present share value enough to scare off the predators? We asked Mr Lord what he thinks about the company's present position.

"The best form of defence against takeover for any listed company is to perform strongly and have that strong performance recognised by the market and reflected in its share price. WCB is working hard to put itself in this position," he said.

"We have delivered a good result in the first half and we are confident about our full year earnings performance. If we again attract attention from our competitors or other interested parties around the world then the board will assess the value of those approaches and whether they meet the interests of shareholders." He said he could not comment on the level at which an offer would be in the best interests of shareholders.

An unresolved financial matter for WCB is the environmental damage caused by underground disposal of effluent over several decades. There is a possibility that it could have to pay for remedial work.

The assessor reported that no groundwater was rendered unusable by the effluent and that erosion was not greater than would be expected through natural processes.

This report when to the auditor, whose own report was presented to the Environment Protection Authority (EPA) yesterday. Its contents will not be known until next week, after which the EPA will decide if any remedial action is needed and who will pay.

Meanwhile, Murray Goulburn has not lost interest.

Chairman Grant Davies said the co-operative was still in the picture because it wants a cheese manufacturing plant in the south-west. "All our cheese manufacturing is concentrated in the north and it makes sense to spread it across the regions so all our eggs aren't in one basket. We have the option of building at Koroit but a merger with WCB is an attractive option."

Murray Goulburn closed its Leitchville cheese manufacturing plant last year due to dwindling supply, concentrating it at Cobram and Rochester.

Echoing the line taken at the time of Murray Goulburn's original bid, he said a merger would bring synergies that would benefit all concerned, including suppliers.

Mr Davies would not be drawn on whether the present share price was an accurate reflection of WCB's value.

"But it is interesting that the market has been paying what Murray Goulburn paid," he said.

Before a Murray Goulburn takeover could proceed it would have to be cleared by the Australian Competition and Consumer Commission.

During last year's pursuit the competition watchdog issued a preliminary report that said a merger could potentially decrease competition for milk supply in the region.

Murray Goulburn strategically withdrew its application before the final ruling was handed down, leaving the door ajar.

The co-operative itself moves into a new era next month when a new chief executive will replace Stephen O'Rourke. The appointment has been made but not yet announced.

If he's a Monopoly player, there will be a game waiting for him.