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Inside the deal: How Saputo won Murray Goulburn

The world of deal making is fairly black and white; whoever pays the most wins.

But when it came to selling one of nation’s biggest milk processors things are a little more complicated. It’s not just about price.

Global dairy giant Saputo last week settled a $1.3 billion takeover for Murray Goulburn, in what is one of the quickest transactions in an industry notorious for being able to get farmers’ approval for deals.

It was just a year ago that Murray Goulburn was in crisis.

Ari Mervis, who started as chief executive in February 2017, was charged with a massive repair job. He needed to claw back market share and put the co-operative on a stable footing.

Competitors were pouncing. Mervis set about cutting costs but he knew the co-operative needed access to capital.

It wasn’t going to be easy. Its farmer suppliers and unit holders, who tipped in $500 million to buy shares without voting rights under a complicated Macquarie-engineered partial float, were burnt.

The group’s former managing director Gary Helou had embarked on an aggressive expansion strategy that drove up debt and left the company exposed to falling milk prices. Murray Goulburn ended up retrospectively cutting milk prices paid to its farmers, forcing some farmers to cull herds, quit their farms or switch to rival processors.

Milk supply was in free-fall, which was a big problem for a low-margin processing business with a fixed cost base.

Saputo CEO Lino Saputo jnr met with farmers across regional Victoria to help secure its bid for Murray Goulburn.
Saputo CEO Lino Saputo jnr met with farmers across regional Victoria to help secure its bid for Murray Goulburn.Rob Gunstone

Needing restructure

By June, Mervis launched a strategic review. Everything was on the table. But it was clear the company would need restructuring. It needed capital.

Following a beauty parade of the big banks, Deutsche Bank, led by head of mergers and acquisitions, Alex Cartel, was given the job on July 24.

Sources close to Murray Goulburn told AFR Weekend the company was impressed by Tim Longstaff, Deutsche Bank’s managing director and a long-term adviser to Western Australia’s CBH Group.

Bega Cheese was the under bidder.
Bega Cheese was the under bidder.

CBH is the nation’s biggest grains exporter. It’s also the country’s biggest co-operative. For nearly a decade Longstaff has worked with the grains handler, seeing off several attempts to privatise or list it on the Australian Securities Exchange.

Deutsche began working on project Vista. What became apparent quickly was that Longstaff didn’t have much time to figure it out.

Murray Goulburn’s milk supplies were tanking at a far greater pace than expected. Just two years earlier it collected a record 3.6 billion litres of milk from farmers. By the time Longstaff was brought in milk supplies had sunk to 2.7 billion litres and were falling fast. It is forecasting an intake of 1.9 billion litres this financial year, losing its place as the nation’s biggest processor to New Zealand co-operative Fonterra.

Farmers were voting with their feet. Loyalty to the co-op is one thing. Saving the farm is another.

Murray Goulburn failed to recover from a disastrous retrospective cut to milk prices.
Murray Goulburn failed to recover from a disastrous retrospective cut to milk prices. Rob Gunstone

The situation pushed Murray Goulburn into a dreaded doom loop. The less milk it collected, the less profit it made. The less profit it made, the harder it was to pay a high milk price and remain competitive.

Longstaff and Mervis knew the situation was likely to get worse.

Tight deadline

Murray Goulburn’s competitors were largely at capacity due to what is known in the industry as the “spring flush”. Milk production rises as dairy herds calve (fresh cows make more milk).

 

But by the end of 2017, capacity would free up, allowing competitors to offer higher milk prices and win over even more of Murray Goulburn farmer’s to their operations.

Mervis set a tight deadline. By October, at the co-operative’s annual meeting, he wanted to put a proposal to his farmer suppliers and unitholders to provide certainty, and stem further milk losses.

The meeting gave Longstaff three months to bed down an attractive deal.

The much-needed injection of capital was complicated by the complex listing structure set up by Macquarie, which undertook a partial float of the business in 2015. It restricted a single entity to owning no more than 0.5 per cent of its issued capital without 90 per cent approval from farmer suppliers.

About 30 parties put their hands up to cut a deal. Half of those signed confidentiality agreements and entered the data room. Only three would end up in the final stages – Saputo, Bega Cheese and Parmalat.

Eager Chinese groups, including Inner Mongolia Yili Industrial Group, didn’t make the cut.

There are suggestions politicians may have warned Murray Goulburn about entertaining an offer from the Chinese because of the potential controversy such a deal would create.

Chasing fair price

 

The Murray Goulburn board, led by John Spark, wanted more than just a fair price for its assets.

It wanted to enshrine some co-operative principles from would-be corporate buyers. It wanted a good milk price for its farmers and commitments to pick up milk from all of them.

This would protect those farmers that were a fair distance from processing assets that some corporate processors may bypass.

It also needed a fair price to be able to distribute to its unitholders.

The likely favourite for a deal was Kidder Williams advised Bega Cheese. It is a home-grown hero that could win over farmers and regulators.

Meanwhile, Moelis & Company managing director Brodie Treloar was working for the Saputo bid named project Roadstar

Saputo chief executive Lino Saputo jnr, who beat Murray Goulburn and Bega for nearby Warrnambool Cheese & Butter in 2013, knew that winning any deal would require winning the hearts and minds of farmers, and doing so early.

Its $1.3 billion deal included $114 million in milk price payments to farmers – a measure designed to retain supply and, therefore, protect the business it was buying. It agreed to pricing and milk collection “into the future”.

It would trump Bega and Parmalat.

Road trips

When the board accepted the bid, Quebec-based Lino Saputo hit the road. He embarked on several road trips across country Victoria, meeting Murray Goulburn farmers and selling the merits of its proposal.

Yet there would be a spanner in the works. The Australian Competition and Consumer Commission wasn’t happy.

All of a sudden things were shaky. The ACCC had competition concerns.

Instead of walking away, Saputo agreed with the ACCC to sell Murray Goulburn’s Koroit plant in western Victoria – one of three biggest assets in its stable. The regulator approved the deal on April 4, just one day before farmers were due to meet in Melbourne to vote on the transaction.

The farmers were on board. Nearly 96 per cent agreed to sell to the Canadians.

Saputo is now looking to regain market share, aiming to grab 600 million litres of milk and boost intake to 2.5 billion litres.

 

‘Best outcome’

While Murray Goulburn will survive, albeit within a corporate structure, it is likely the complicated listing structure that allowed farmers to have their cake and eat it too is dead and buried.

Much has been written about the disastrous retrospective milk price cuts.

But industry and banking sources say the structure established by Macquarie created a straitjacket for management.

It tied dividends to a milk price. It tied also executive remuneration to a milk price. It was a structure that worked in good times but left the co-operative exposed in bad times.

“I don’t think that structure has any credibility,” said one industry source.

As another major processing asset fell into foreign hands, farmers are stoic.

“People were congratulating the directors. At previous AGMs that was not the case,” said one executive who attended the meeting. “It was sad, but it was the best outcome.”

Source: Financial Review

(T4, D1)

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