MG makes its move

I used to think of our co-op as a bit like the ABC: your favourite aunty. Comfortable, dowdy, trustworthy and a little quirky.

But Aunty MG has undergone a transformation.

Since it acquired a new CEO, Gary Helou, in October 2011, Murray Goulburn has embarked on lancing $100 million of costs, opened up in Dubai, restructured the way farmers are paid for milk, revamped its retail trading store network, developed assistance packages for the next generation of farmers and forged the spectacular Coles fresh milk deal. At least, these are the “headline acts” that come to mind.

Now, MG is making a $420 million bid for its rival, Warrnambool Cheese & Butter, gazumping Bega Cheese and Canadian dairy giant, Saputo.

According to MG, (if the bid is successful) the new Murray Goulburn Warrnambool:

“Creates a new 100% Australian farmer-controlled dairy food company with over 3,000 supplier shareholders delivering more than 4 billion litres of milk to nine processing sites annually. The business will be positioned for strong growth in both domestic and international dairy markets with forecast revenues in financial year 2014 of $3.2 billion including export sales of $1.4 billion to over 60 countries.”

This, Gary Helou wrote in a letter to MG’s farmer shareholders yesterday, would bring the coop, “…the necessary scale, market reach and competitive strength to capture the benefits of the historic growth opportunity resulting from the consumer affluence of developing Asian economies.”

MG’s triple-jump

The bid is in, it’s the most lucrative on offer and it’s Australian, yes, but there are three serious hurdles for MG:

1. A bidding war

What will Saputo and Bega do next? WCB traded higher yesterday, closing at $7.89, a sign that markets believe MG’s $7.50 isn’t enough to win the bidding war.

2. Shareholder seduction

WCB rejected a takeover offer from MG in 2010. At the time, there was quite a bit of anti-MG sentiment. It’ll be interesting to see if the reinvention of Aunty and a bigger bucket of cash will make a difference.

The Sydney Morning Herald reported Mr Helou said yesterday that farmers supplying WCB needed to consider the future of the Australian dairy industry when deciding on the take-over bid.

“For farmers generally, they are at a fork in the road today.”

“If they sell out to a private company, that they have no control over … they will be spectators.”

“What we are putting on the table is an offer for them to take a stake in every step in the value chain.”

“It’s a fundamental, philosophical different point of view.”

3. The competition watchdog

Back in 2010, the ACCC was loathe to allow MG to acquire WCB. As reported in the SMH at the time:

THE competition regulator says its preliminary view is to oppose Murray Goulburn’s proposed acquisition of Warrnambool Cheese & Butter on the grounds it would cut competition in some markets for raw milk.

The Australian Competition and Consumer Commission said yesterday it was concerned the proposed deal “would substantially lessen competition for the acquisition of raw milk from farmers in the relevant markets within South Australia and Victoria”.

“The potential effects in the relevant markets include a significant reduction in farm-gate prices paid to farmers for raw milk; and reduced competition in the offer of non-price terms such as finance, field advice services and discounted hardware and grain supplies.”

The irony of the ACCC’s 2010 statement is that Murray Goulburn’s mission, as a 100% farmer-owned co-operative, is precisely to return the maximum price to farmers — something to which the listed Bega Cheese nor the privately owned Canadian giant Saputo cannot lay claim.

I hope it takes a broader perspective this time. A serious exporter battling subsidies and tariffs around the world, MG needs scale so that its processing can be as efficient as its farmers. The Australian government does not afford our dairy farmers the protections enjoyed by most of our competitors. The least it can do is allow us to grow.

UPDATE: See this article and extended AFR interview with MG CEO Gary Helou:

7 thoughts on “MG makes its move

  1. I wonder if we farmers can have a mature discussion about this. People like me raise alternative points of view we get howled down and labelled anti-coop every time.
    MG has always been hailed as a big efficient coop, so efficient that as soon as a new CEO comes in he is able to slash $100m of cost out of the business, money that could’ve been in farmers pockets long ago. This leads me to wonder how MG would be without the competitive pressure from other processors……

    • Really good point, Nick, and I’m certainly not going to label you as anti-coop.

      I reckon a big MG (even if a bloated one) was probably more efficient than lots of small processors but it clearly wasn’t anywhere near as efficient as it needed to be.

      Do you think Fonterra suffers from its lack of competition?

  2. The WCB bidding war is really interesting, mainly because in a high export year, higher returns for farmers, we have 2 local and 1 overseas dairy companies wanting to buy? WCB says it is worth alot because of export deals it has, in a good export year and this has up’d the price. Considering some of these businesses couldnt pay more last year in one of the toughest years ever in the south, how come they consider it affordable to purchase now? Their certainly has been an inflation in share price in the last 3 months.
    The WCB farmers get a double whammy though, higher returns for milk this year…increased profit, and then an extra load of $$ for shares. Older farmers with little debt stick it in super or FMD’s to save tax, younger farmers pay off debt or reinvest in equipment etc and can get a nasty tax surprise and a “blip” in their averaging.
    MG needed Gary Helou and he is good for the dairy industry, but does Gary need WCB to better the business or to lessen competition? WCB shareholders will decide…….have fun!

  3. Hi, Thanks for you blog. Just wanted to point out that this time around (as opposed to the 2010 bid) things are a bit different – the Australian Financial Review has reported that Murray Goulburn will be seeking to bypass the ACCC and going instead to the Competition Tribunal for approval for the merger. MG will be seeking to establish at the Tribunal that the merger is in the public interest.

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