Fonterra's target fires back

By LIAM DANN

Pressure is mounting on Fonterra to increase its bid for Australian dairy company National Foods as the takeover target's share price continues to soar.

National Foods shares closed at A$5.79 yesterday - 34Ac above Fonterra's offer price.

Analysts on both sides of the Tasman now believe Fonterra will have to sweeten its hostile offer if it wants to reach 100 per cent ownership.

Brokers say hedge funds have been driving up the share price as they gamble that a rival bidder will join the race or that Fonterra has more money up its sleeve.

Speculation that a rival bidder may emerge has now been dismissed as unlikely by most Australian analysts, but that did not stop the share price rising yesterday.

A senior New Zealand broker said Australian investors had a built-in conviction that the first bid in a takeover play would not be the last.

"The hedge funds certainly play that game and, by and large, they tend to do well out of it," he said.

In almost every Australian takeover play of the past few years, the bidder had been required to increase its offer, he said.

Fonterra would have been well aware of that.

Fonterra's management would not comment on the share price.

The dairy giant says its price is "aggressive" and extremely fair.

It has given no indication that it will increase the offer.

Fonterra plans to pay for the acquisition with debt.

The present offer price would push Fonterra's gearing to 55 per cent, beyond a self-imposed comfort level of 40 per cent to 50 per cent.

But the broker said that for Fonterra, the upside of the hedge-fund stampede was that it could deliver National Foods to Fonterra on a plate.

The funds' presence shifted the power balance away from long-term National Foods shareholders.

"The hedge funds are, by their nature, short-term holders," he said.

A lot would depend on if, and how much, Fonterra could afford to move.

An Australian analyst said good news from National Foods in the past week had helped lift the price.

The company's performance was improving and the strong profit forecast - issued early by the board on Friday - added to its value.

Analysts had been ready to increase their valuation of National Foods even before the Fonterra bid.

But the bigger factor was a belief that the synergies National Foods offered for Fonterra were large and not yet fully reflected in the price.

Control of National Foods would give Fonterra access to the Australian fresh milk market, a portfolio of consumer brands and another foothold in the Asian market.

"I don't think it's right that an acquirer has to pay all of the synergistic benefits away to the takeover company shareholders, but I think they've got to pay something," the analyst said.

He said the feeling in Australia was that Fonterra's present offer would not get 100 per cent of National Foods, but it might get more than 50 per cent to take a controlling stake.

Fonterra already owns 19 per cent of the company.

The National Foods share register is widely spread. Outside of Fonterra, only two financial institutions - one Australian and one American - hold stakes bigger than 5 per cent.

Most of the other top 20 institutional holders are outside Australia.

The analyst said that while they might be inclined to take "a bird in the hand offer", the hedge funds were giving them the chance to take an even better one on market.

Fonterra's offer

A$5.45 a share.

Yesterday's share price: A$5.79.

This Week

Yesterday: National Foods chairman Barry Capp sends a letter to shareholders telling them Fonterra's offer is "grossly undervalued".

Thursday: National Foods AGM, in Sydney. Likely to give management and shareholders ample opportunity to debate the bid.

Friday: Fonterra's formal bid expected to go to National Foods.