KEY POINTS:
An independent adviser's report has found that Affco subsidiary Dairy Trust's takeover bid for Open Country Cheese has "no compelling merit" for the Waikato dairy exporter's shareholders.
As a result, Open Country's independent directors are "strongly urging" shareholders not to accept a bid they say seriously undervalues the dairy exporter.
Dairy Trust announced its play for Open Country in early May, offering 1.68 Dairy Trust shares for each Open Country share - which it valued at $2.25.
However, Open Country's independent directors - Wyatt Creech, Duncan Milne and Bruce Clothier - took issue with the valuation, noting its shares had traded significantly higher on several occasions and that there was no cash offer. The shares last traded at $2.60 on the Unlisted platform.
They called the offer "inadequate" and awaited an independent adviser's report into the merit of the bid. Ferrier Hodgson's report - released late yesterday - found "no compelling merit in OCC shareholders accepting this offer unless they believe Dairy Trust will deliver significantly larger growth than OCC can achieve on its own".
In justifying their recommendation, the independent directors note the independent adviser has valued Open Country shares much higher, at $3.10 to $3.47, and believes the Dairy Trust offer overvalues the Dairy Trust shares by 21.8 per cent.
They said the absence of a cash option "removes the opportunity for shareholders no longer wishing to be part of either Open Country or Dairy Trust to exit and receive fair value for their shares in Open Country".
The directors also note the offer fails to adequately compensate Open Country for a milk powder plant under construction or compensate the majority of shareholders for "the loss of control that will occur".
Dairy Trust's bid offers OCC shareholders a "much riskier pathway forward. The swap would be for shares in a successful operating company with a track record of performance for shares in a company that has not earned a cent from dairy processing to date."
The main parties involved in Dairy Trust - Talleys Fisheries, Dairy Investment Fund and Balle Bros - have 43 per cent of Open Country's shares but the offer is conditional upon their gaining at least 50.1 per cent.
