Fonterra tries big guns

Fonterra has raised the stakes in the duel for National Foods, making a bid which values the Australian dairy company at $2 billion. But analysts say it may have to pay even more.

Fonterra yesterday offered A$6.20 a share for full control of its target.

It has waived all offer conditions other than reaching 50 per cent control.

The long-awaited bid was more dramatic than many analysts had predicted - representing a 30Ac premium over San Miguel's rival offer. San Miguel's bid of A$6 made in December is now effectively valued at A$5.90, because National Foods has paid a dividend of 10Ac a share, which will be deducted from the final price.

If Fonterra only manages to take a 50 per cent stake it will pay just A$6 a share. As it already holds a 20 per cent stake in National Foods, full control will effectively cost it $1.58 billion.

National Foods shares - now held by a large number of hedge funds gambling on the final price - surged 14Ac on ASX to close at A$6.37. Traders are gambling that this is not a knock-out bid.

At A$6.37, Fonterra would have to pay about $60 million more.

National Foods directors - who originally called the Fonterra takeover hostile - yesterday endorsed the revised bid recommending shareholders accept - unless a better offer emerged.

San Miguel was saying little. It said it was considering its position and would respond in due course.

CommSec consumer staples analyst Craig Woolford said Fonterra was now in a strong position. "The ball is definitely San Miguel's court."

How far San Miguel was prepared to go was tough to read, he said.

But because San Miguel was using a mix of cash and debt to fund its bid it could afford to make a higher bid.

Fonterra will fund its bid entirely through debt. CommSec research suggests that Fonterra could also afford to come back again.

The broker has estimated that the synergies Fonterra will extract from the deal allow it to bid as high as A$7.

Other brokers have picked that Fonterra will bow out at closer to A$6.30. In Fonterra's favour is its 19.9 per cent stake. This enables it to cash in on the bidding war. If the price goes beyond what it is prepared to pay, it can sell to San Miguel and use the cash to build its Australian business in other ways.

If Fonterra is successful, it also faces another A$18 million cost because of a prior agreement San Miguel has with National Foods to pay a fee if its bid is unsuccessful.

Fonterra does now have the backing of its own farmer shareholders for the bid.

Dairy Farmers New Zealand chairman Kevin Wooding - who hasn't been afraid to voice concerns in the past - said yesterday that farmers had confidence Fonterra's directors were making the right decisions.

Fonterra chairman Henry van der Heyden - who is in the middle of a series of shareholders meetings - said he had received almost unanimous support for the bid from the farmers he was meeting.

Ultimately it was a decision for directors and was not based on farmers' sentiment whatever that might be, he said.

The option for National Foods shareholders to take payment in Fonterra redeemable preference shares has been added terms of the offer.