Australian Fine Foods

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Saputo takes over Murray Goulburn

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. Just two years ago, Murray Goulburn was suffering a crisis. Ari Mervis, the chief executive was tasked to do a repair job of the company. He needed to manage the market share and put the cooperative on a stable footing. He knew that capital is essential to cooperate. So many competitors are waiting. It wasn’t going to be an easy task for him to get the company to recover. 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.

The company Murray Goulburn ended up cutting milk prices paid to its farmers, forcing them to cull herds, quit their farms or switch to rival processors. The production of milk was in a free-fall which became a big problem for them because they are a low-margin processing business with a fixed cost base.

Mervis strategised a “restructure” for the company. But of course, they needed capital to do it. They hired Alex Cartel, head of mergers and acquisitions in Deutsch bank. 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.

Murray Goulburn is in a bad position, the less milk is collected, the less profit they made. The less profit they made, the harder it was to pay a high milk prices and remain their competitive position in the market. They knew that it was getting worse than expected.

Murray Goulburn experienced a “Spring flush”, milk production rises and dairy herd calves(fresh cows make more milk) they have their ups and downs. But by the end of 2017, capacity would free up, allowing competitors to offer higher milk prices and win over farmers of Murray Goulburn to their operations.

Mervis set a meeting about a deadline for their farmers and unitholders. He wanted to put a proposal to have certainty on their farmers, and stop further milk losses. The Murray Goulburn board, led by John Spark, wanted more than just a fair price for its assets.

It wanted to enshrine some cooperative principles from would-be corporate buyers. It wanted a better 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 needs a fair price for its unitholders.

The likely favourite for a deal was Kidder Williams advised Bega Cheese. It is a homegrown hero that could win over farmers and regulators. 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 price and milk collection “into the future”.

When the board accepted the bid, Lino Saputo goes on a business trip across country Victoria, meeting Murray Goulburn farmers and selling the merits of its proposal. The Australian Competition and Consumer Commission (ACCC) weren’t happy. They had concerns about the competition.

Instead of walking away, Saputo agreed with the ACCC to sell Murray Goulburn’s Koroit plant in western Victoria – one of the 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% 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.

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.