Warrnambool farmers pivotal in global battle for Australia's oldest dairy producer

Reuters

* Farmers own 30-40 pct of Warrnambool Cheese and ButterFactory Co

* Warrnambool at the centre of a three-way internationalbidding war

* Farmers at Warrnambool divided over contending bids

By Sonali Paul and Jane Wardell

WARRNAMBOOL, Australia, Nov 19 (Reuters) - Dairy farmers inthe tiny Australian town of Warrnambool, battered in recentyears by drought, a stubbornly high currency and a bruisingsupermarket war over milk prices, are on the cusp of a muchwelcome windfall.

Along with milk truck drivers and other suppliers, thefarmers in this sleepy coastal town with more cows than peoplehave emerged as the kingmakers in an international battle forAustralia's oldest dairy producer.

And they are not simply looking at the topline offer.

"At the end of the day, farmers just want to be paid well,"said Simone Renyard, whose husband's family has been bothsuppliers and shareholders of Warrnambool Cheese and ButterFactory Co for generations. "If we get well-paid, mostfarmers aren't going to care which way it goes."

Renyard's dairy farm is one of many in the lush green fieldsnear Warrnambool town, which marks the western end of the GreatOcean Road.

No one is quite sure what the name Warrnambool means. Somesay the Aboriginal word means "two swamps", some say "amplewater".

The quiet backroads of the town, which carry little trafficbeyond giant milk tankers, are a world away from the officeboardrooms usually at the centre of takeover wars.

Locals collectively own 30 to 40 percent of Warrnambool, the125-year-old company at the centre of a three-way bidding warled by Canada's Saputo Inc. Their combined stake makesthe farmers the largest shareholder in the firm.

Warrnambool's board is backing a A$505 million ($472.81million) unconditional cash bid from Saputo, rejecting amatching A$9 per share cash offer from Murray GoulburnCo-operative Ltd that is dependent on regulatory approval, aswell as a cash and scrip offer from Bega Cheese Ltd currently worth A$9.22 per share.

The trio are clamouring to lock in a key exporter of bothtraditional dairy and high-tech milk extracts to benefit fromsurging demand from Asia.

Their frenzied bidding has doubled Warrnambool's marketvalue to A$520 million in just three months, and is now shiftingthe fight from the boardroom to the milking room.

"It's up to the farmers now to decide what they want," saidMark Topy, an analyst at Canaccord Genuity in Melbourne. "And Ithink they will be slow and deliberate in making a decision."

FARMERS DIVIDED

Those whose families have worked the rolling green hills forgenerations are far more concerned about the protection of jobsand milk payments than bumper dividends and share prices.

Farmers whom Reuters spoke to on Monday were divided overwhether or not to accept the bid from Saputo, a foreign company.Those not in favour of the bid are looking at a local championcapable of competing internationally and who would safeguardlocal interests first.

"It's a difficult decision for suppliers," said GeraldineConheady, who owns four dairy farms with her husband, Edward,supplying around 56,000 litres a day to Warrnambool in peakseason.

Life as a dairy farmer is a tough business in Australia,where a hospitable climate is periodically marred by drought,bushfires and floods. Dairy farm numbers have shrunk to 6,700from almost 12,000 just over a decade ago.

The first dairy cows arrived in New South Wales in 1788 withthe First Fleet from Britain that settled the country. But itwasn't until the late 1800s that the dairy industry began toproperly take off as farmers established cooperatives totransport, process and market milk.

Warrnambool was one of the first of these, founded in 1888by a group of farmers and merchants in its namesake town inVictoria state.

The region is now home to the majority of Australia's dairyfarms. It is responsible for almost two-thirds of the country'stotal dairy production, worth around A$4 billion at the farmgate and A$12 billion value-added through the food industry.

Suppliers leaning in favour of Murray Goulburn's bid arefocused on keeping the business in Australian hands or in aco-operative.

"The industry in Australian has been shrinking, shrinking,shrinking. We feel if it stayed Australian, you do have a degreeof control over your own destiny," said Edward Conheady, athird-generation dairy farmer with a small stake in Warrnambool.

"We're shooting in the dark, but we're tending to go forMurray Goulburn," he said. "It's our last opportunity to keepsomething Australian."

SAPUTO SUPPORT

Those leaning in favour of the Saputo bid want to ensurethey have a choice of manufacturers to whom they can supplytheir milk.

Warrnambool Chief Executive David Lord stressed Saputo'spledge to put Warrnambool at the heart of its Australianoperations and retain jobs in the region.

Bega's cash and scrip offer is reliant on what Lord terms aninflated share price, while Murray Goulburn faces a lengthyprocess to receive regulatory approval for its bid.

"Cash is king, the Saputo offer provides the ultimatesecurity for shareholders," Lord told Reuters. "It alsopreserves the jobs of existing employees."

Farmers are also concerned about the debt Murray Goulburn isgoing to have to take on to seal a deal. Gearing levels atMurray Goulburn will rise 3 percentage points to 56.7 percent ifthe bid is successful.

"To service that they may have cut prices to milksuppliers," said Nick Renyard, Simone's husband, whose familyhas been in dairy farming for more than 40 years with more than1,000 acres now being farmed.

STALEMATE?

All the contenders are eyeing the burgeoning Chinese dairyimport market, which has expanded to around $4 billion currentlyfrom $400 million 10 years ago.

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

With the prize so great, Murray Goulburn hasn't ruled outraising its bid, although analysts warn it will need to take itsoffer beyond A$10 per share to have any hope of winning approvalfrom the Warrnambool board.

Lord declined to comment on potential valuations or offers,but said the board was committed to reviewing any and all offersor improved bids.

Canaccord Genuity's Topy said the risk now is that thebattle drags on with none of the major players making anyground, leaving Warrnambool with a split share register. Begaand Murray Goulburn hold around 18 percent each currently, withSaputo owning less 5 percent.

Bega and Murray Goulburn executives are holding meetingswith shareholders in Warrnambool on Tuesday, following in thefootsteps of Saputo's Lino Saputo Jnr, hoping to sway localinvestors.

Regardless of the differences among farmers, the underlyingdesire is the same.

"It's about protecting our viability into the future," saidEdward Conheady.($1 = 1.0681 Australian dollars) (Editing by Ryan Woo)

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