Little extra likely from Fonterra

By LIAM DANN

Fonterra could find another $75 million to top up its $1.5 billion bid for National Foods, says independent Australian broker Austock.

But the Melbourne-based firm is predicting that Fonterra will not go as far as matching National Foods' share price.

The shares closed up 4Ac at A$5.84 on the ASX yesterday - about 7 per cent above Fonterra's offer of A$5.45.

Austock agri-business analyst Paul Jensz said in a research report that Fonterra was likely to limit any increase in its bid to a maximum of 5 per cent. Such a rise would add $75 million to the cost of the bid.

The National Foods board has rejected Fonterra's bid, saying it "grossly undervalues" the company.

Australian investors appear convinced Fonterra will lift the bid, but Jensz recommends National Foods' shareholders take advantage of the current share price and sell now for anything over A$5.60.

Fonterra's 12,000 farmer shareholders would provide a "conservative" bid ceiling, he said. "They will want a significant margin of safety in the bidding process."

A 5 per cent rise - taking the offer price to A$5.72 - would be a 23 per cent premium over National Foods' share price before the bid.

Jensz said the likelihood of a rival bidder emerging now looked extremely low.

Fonterra did not need to offer a 30 per cent premium - a figure suggested by National Foods' management last week - without that price tension.

At A$5.72, Fonterra would be at its upper limit in relation to its ability to extract synergies from National Foods.

Austock estimates Fonterra can extract A$40 million in synergies through consolidating National Foods' Australian head office and rationalising production and distribution, and from greater negotiating power with supermarkets.

Increasing the offer price would raise some concerns about Fonterra's debt position.

Fonterra's management has admitted that the National Foods bid - even at the present price - will take its debt level outside a self-imposed comfort zone.

Jensz said every 5 per cent increase in the bid would add about 1.5 per cent to Fonterra's debt/equity ratio and make it tougher to justify the earnings-positive nature of the deal to bankers and debt holders.

Fonterra's board met in Auckland yesterday. While it was a regular scheduled meeting, the final price that Fonterra can pay for National Foods is likely to have been a hot topic around the boardroom table.

Management yesterday dismissed suggestions on the agri-business website Rural News that the bid could knock 4c/kg off the annual payout to its farmers. A spokesman said the bid was organised so that it would not reduce the payout.