THE nation’s biggest dairy exporter Murray Goulburn is preparing to raise up to $500 million from investors outside its co-operative shareholder base for the first time in its 63-year history, as it seeks to fund ambitious growth plans.Macquarie Group has been appointed to craft an equity raising similar to the $NZ500 million ($443 million) “trading among farmers” scheme unleashed by the world’s biggest dairy exporter, Fonterra, in November 2012.

Sources close to the negotiations told The Australian Financial Review ­Murray Goulburn was looking to raise a similar amount to Fonterra but that it could take up to six months to execute. This scotches suggestions the raising is needed to fund Murray Goulburn’s $504 million takeover bid for Warrnambool Cheese & Butter (WCB).

Murray Goulburn chief executive Gary Helou declined to comment. It is expected he will confirm the plan to shareholders at its annual meeting on Friday, following a nine-month review of its capital structure.

A Murray Goulburn spokesman declined to comment on the potential capital raising but did say reports in the media that it was seeking external capital to fund its WCB bid were “incorrect”.

Lazard is advising Murray Goulburn on the WCB bid.

“Murray Goulburn has been considering various funding options for some months, but whatever recommendations it takes to its shareholders will simply mark the beginning of a lengthy and exhaustive consultation process with members,” the spokesman said.

“The debt we incur to fund our current bid is by no means excessive for a co-operative in a growth phase – indeed Fonterra’s debt in recent years has been comparable.”

Murray Goulburn is the nation’s biggest milk processor, accounting for 30 per cent of the market. It generated revenue in fiscal 2013 of $2.4 billion and a $35 million net profit. If it were listed on the Australian Securities Exchange it would dwarf its rivals Bega Cheese and takeover target WCB.

In fiscal 2013 Bega Cheese generated $1 billion revenue and a net profit of $25 million while WCB managed $497 million in revenue to generate a $7 million net profit.

In a letter to shareholders on September 2, the week before Bega Cheese kicked off the three-way bidding war for WCB, Mr Helou said Murray Goulburn would “require significant additional capital to upgrade capabilities and capacity to meet expected international demand [but] the co-operative structure and farmer control are not being reviewed”. He wrote that the board was considering increasing its bank debt, the sale and leaseback of assets, retention of profits, raising additional equity from farmer shareholders and raising equity from external shareholders.

But as the Financial Review predicted last week, the co-op is expected to tell its 2500-odd farmer shareholders it has firmed on an external equity raising via a share trading scheme at its annual meeting in Melbourne on Friday.

Fonterra’s “trading among farmers” scheme, which enables farmers to buy or sell Fonterra shares among themselves instead of purchasing or redeeming them through the co-op, was affirmed with two thirds of its farmer shareholders approving the listing at a special meeting in June 2012.

The scheme retained 100 per cent farmer ownership and control by creating two classes of shares. Wet shares have voting rights and are owned by farmer suppliers. Dry shares allow non-farmer investors to own economic rights to Fonterra’s earnings and dividends without voting power.

Fonterra listed its units in Australia and New Zealand at $NZ5.50 a share, implying an EV/EBIT of 11.6 times Fonterra’s 2013 earnings. Fonterra Australia managing director Judith Swales said it took years for the dairy giant’s float ambitions to come to fruition.

Mr Helou has said plans to raise equity were unrelated to the $350 million of debt funding Murray Goulburn’s banks provided for its WCB bid. But it is likely that a considerable part of the raising would be used to pay down debt. Based on a successful WCB takeover at Murray Goulburn’s most recent offer price of $9 cash per WCB share, pro forma debt would be more than $1 billion.
Source: Julie-Anne Sprague and Tim Binsted – Queensland Country Life