Fonterra expected to lift bid above A$6

Fonterra is expected to lift its offer for Australian takeover target National Foods this week, putting the pressure back on rival bidder San Miguel.

The majority of analysts and industry insiders spoken to by the Herald are picking Fonterra will make the move - even though it would lift the price tag close to $2 billion.

Fonterra management has steadfastly refused to comment.

Even senior dairy farming personalities - who have voiced concerns at the cost of National Foods - said they would be surprised to see Fonterra walk away at this point.

Under Australian stock exchange rules, the giant dairy cooperative has until 5pm tomorrow to make any changes to its A$5.45-a-share bid for full control.

That original offer, launched last October, was trumped by Filipino brewer San Miguel in December. Fonterra must now top A$6 a share - or A$1.78 billion ($1.94 billion) - if it wants to have any chance of success.

Most analysts are picking Fonterra will make a cautious revised offer of about A$6.05 a share.

Fonterra has had the luxury of doing a thorough due diligence on National Foods.

Despite originally taking a hostile stance, National Foods opened its books in the interests of providing greater price certainty and eliciting a higher bid.

Analysts say Fonterra can reap far greater synergies than San Miguel. One broker - Commonwealth Securities - has estimated Fonterra can afford to pay up to A$7 a share and still make the deal work.

Fonterra - as chief executive Andrew Ferrier said this month - is prepared to take its own time.

A knockout bid of A$6.20 might be quicker but would open the company to accusations of paying too much if San Miguel did walk away.

Slow increases in bids would test the considerable market speculation that San Miguel does not have the heart for a protracted battle.

Ferrier says Fonterra must dominate its home market of Australasia if it is to succeed with its long-term strategy of creating a successful consumer dairy business in Asia.

On Friday, National Foods blamed the takeover situation for denting its half-year profits.

The takeover target reported increased sales for the half year to December 21 but profits fell 13 per cent due to the legal and broking costs associated with the two takeover bids. Its shares closed at A$6.23.