Broker tips Fonterra bid to rise

Fonterra is likely to raise its bid for National Foods by 15 per cent to A$6.27 ($6.84), says independent Australian broker Austock.

That price values National Foods at $2.03 billion and would see Fonterra pay about $1.62 billion for the 80 per cent stake that it does not already own.

Austock agribusiness analyst Paul Jensz picks that Fonterra will outbid rival Filipino brewer San Miguel with that price.

But Jensz says Fonterra is likely to wait as late as March before increasing its offer.

Fonterra launched its hostile bid for Australia's largest listed dairy company last October, offering A$5.45 a share.

That price was topped on December 30 when San Miguel offered A$6 a share in a bid that has the backing of the National Foods board.

In a report, Jensz outlines a likely sequence of events which sees Fonterra initially extend the February deadline for its bid without increasing its offer price.

That would let Fonterra directors review San Miguel's bidder statement, due at the end of this month.

Fonterra could use the extra time to explore other opportunities in Australia and the possibility of consolidating assets with National Foods.

San Miguel is unlikely to raise its bid beyond A$6 because it can only extract about A$8 million in synergies from merging National Foods with its existing Australian operations, Jensz says.

Fonterra is expected to get synergy benefits of A$40 million a year.

The report's predictions are based on two key factors, Jensz says.

One is the "immovable fact" that Fonterra must have a strong Australasian base to launch its assault on a top-three position among global dairy companies.

The other factor is "a halo effect" in which Asian food companies tend to attach a large premium to Australian food earnings and brands.

Jensz says if events do not unfold as predicted, this effect has probably been underestimated.