Fonterra to extend offer

Dairy giant Fonterra is this week expected to extend its $1.5 billion bid for Australia's National Foods beyond next week's cutoff date, even though it knows it has no chance of succeeding unless it pays more.

The co-operative is thought to be mulling whether to raise its A$5.45 a share offer to beat a rival A$6 bid by Philippines brewer San Miguel.

But under Australian takeover laws it must make any changes seven days before it closes on February 1.

By extending its offer, Fonterra buys itself time to consider San Miguel's terms, which could be revealed as early as this week. If Fonterra does decide to lift its bid it might be able to limit increases in cash payments with conditions more favourable than those imposed by the brewer.

It might also use the extra time to explore other opportunities in Australia and the possibility of consolidating assets with National Foods.

The widely held market view was also supported by the Sydney Morning Herald, which said Fonterra's board was understood to have approved an extension.

A Fonterra spokesman last night declined to comment. National Foods' shares closed Friday up A2c at A$6.24.

Analysts believe Fonterra will not walk away from National Foods without a fight because it has too much to gain. The buy would give Fonterra a dominant position in the Australasian dairy industry, a broad portfolio of high-value fresh-milk products.

It would also give it a solid foundation to expand into Asia.

Austock agribusiness analyst Paul Jensz says Fonterra is likely to raise its bid for National Foods by 15 per cent to A$6.27. That would value 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.

Jensz believes such an offer will prevail, because San Miguel will struggle to justify a higher price. He claims San Miguel would only extract about A$8 million in annual gains from merging National Foods with its existing Australian operations. This compares with an estimated A$40 million in annual benefits for Fonterra.

But Commonwealth Securities is picking a protracted bidding war that could see Fonterra paying up to A$7 a share. That would value National Foods at almost $2.25 billion.

Commsec argues Fonterra can theoretically afford to pay A$7.50 a share. But it says a price of A$7 will be enough to see off San Miguel. And, it claims, even at A$7.50, National Foods would boost Fonterra's earnings per share by 0.3 per cent.

Dairy farmers, though, are nervous and some want Fonterra to walk away. San Miguel launched its bid for National Foods on December 30. The offer was supported by National Foods even though it fell short of the estimated A$6.11 to A$6.65.

San Miguel already owns 50 per cent of the Australian fruit juice-maker Berri.

WAITING GAME

Dairy giant Fonterra is expected to extend its A$5.45 a share offer for National Foods.

The move will give it more time to decide whether to beat a A$6 a share offer from Philippines brewer San Miguel as well as explore other takeover opportunities in Australia.

Most observers expect Fonterra to lift its bid and some believe it can afford to pay as much as A$7 a share.