Saputo-Fonterra duopoly hot spot worries ACCC

MG's Koroit factory sale to Saputo poses duopoly risk says ACCC


Agribusiness
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The Australian Competition and Consumer Commission says it has only one area of concern about Saputo's $1.3 billion MG takeover bid - Koroit

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Murray Goulburn (MG) says it is keen to co-operate with the national competition regulator following concerns emerging about the sale of one of the dairy co-operative’s Victorian factories in its $1.3 million deal with Saputo Inc.

The Australian Competition and Consumer Commission (ACCC) says, so far, it has just one area of concern about the deal – a negative impact on milk prices in Victoria’s Western District if MG’s Koroit plant sells to Saputo.

“We are concerned this transaction would ultimately lead to lower prices being paid to dairy farmers in the region,” said ACCC commissioner, Rod Sims.

The ACCC suggests adding Koroit to Saputo’s stable could take a significant third party out of the market and substantially erode competition for farmers’ milk in southern Victoria.

Yet, the competition regulator also acknowledged it had heard from farmers who “just want the Saputo transaction to proceed” to clear up uncertainty hanging over the financially troubled MG.

The ACCC’s concerns are Saputo and Fonterra would be more likely to offer lower prices if Saputo acquired Koroit ... there would be very limited alternatives for many farmers - Rod Sims, Australian Competition and Consumer Commissioner

Canadian cheese giant, Saputo, already owns Australia’s biggest single dairy processing plant, the Warrnambool Cheese and Butter (WCB) factory at Allansford.

It bought the factory, less than 30 kilometres up the Princes Highway east of Koroit, after a winning a four-way battle for WCB shares in 2014.

The other notable competition for milk in the region is New Zealand-owned giant, Fonterra, which has a plant at Dennington, just outside Warrnambool, and another nearby at Cobden to the north.

“The ACCC’s concerns are Saputo and Fonterra would be more likely to offer lower prices if Saputo acquired Koroit, and that there would be very limited alternatives for many farmers,” Mr Sims said.

He noted when MG dropped its prices, triggering the big price crash in mid 2016, Fonterra was quick to follow.

“Our analysis has shown many farmers switched to Saputo in response, the only other major processor nearby,” Mr Sims said.

The big milk buyers

The ACCC had calculated Saputo’s WCB plant at Allansford and Murray Goulburn’s Koroit factory would have more than two thirds of the raw milk processing capacity in south western Victoria and the south eastern South Australia region.

The two plants currently acquired most of the raw milk from dairy farmers in the area.

“We are concerned this transaction would ultimately lead to lower prices being paid to dairy farmers in the region,” Mr Sims said.

What do farmers think?

The government watchdog wants to hear what the dairy industry, including the major processors, have to say about its concerns within a fortnight.

Its statement of issues was not a final decision on MG’s asset sale, rather a preliminary view of the ACCC’s opinion on the deal.

It would continue its review process, with the intention of  making a final decision by March 29.

MG responded to the ACCC statement saying it wanted to co-operate to address the ACCC’s concerns and it still believed a successful transaction with Saputo was the best outcome for MG’s stakeholders.

It has made no reference to a “Plan B” sale alternative for the Koroit factory, although previous unsuccessful bidders such as Bega Cheese, are potential fallback options.

MG’s sale plans continue

“MG will continue to work closely with Saputo and the ACCC to be able to achieve completion,” a company statement said.

“We have received support from suppliers and shareholders regarding the security and certainty this transaction will deliver.

“The successful completion of the asset sale remains MG’s primary focus.

MG’s preparations for seeking shareholder approval for the sale of seven factories and related assets in three states were “well advanced”.

The co-operative expected to issue an explanatory memorandum and notice of meeting convening an extraordinary general meeting to consider the sale shortly after there was clarity around the ACCC’s review process.

The troubled Murray Goulburn reported last month that its milk intake was down nearly 30 per cent to 1.1 billion litres in the six months to December 31. Revenue fell $1.1 billion, down 5.1 per cent.

MG has warned if the Saputo deal does not go through as planned, its current financial difficulties, including its ability to pay farmers competitive milk prices in 2017-18 may be at risk, leading to further supplier attrition.

The co-op has also flagged potential breaches of loan arrangements and loss of creditor support if the Saputo deal is in doubt.

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