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MG Unit Trust units jump to 4-month high

MG Unit Trust units jump to 4-month high after Yili confirms approach to Murray Goulburn

By Jonathan Underhill

Sept. 21 (BusinessDesk) - MG Unit Trust units jumped to their highest level in almost four months on the ASX after China's Inner Mongolia Yili Industrial Group confirmed it had joined the throng of dairy companies that are reportedly interested in bidding for Australia's Murray Goulburn.

MG Unit Trust rose 12 percent to 87 Australian cents on the ASX, and earlier touched 94.5 cents, the highest since late May. Yili said it had submitted "a cautious non-binding strategic development proposal" to the unprofitable dairy cooperative although its Chinese language statement described media reports it had offered A$1.20 per unit as market speculation. The unit trust has a similar function to Fonterra's Shareholders' Fund.

Murray Goulburn and Fonterra are the biggest dairy processors in Australia, each handling about 2 billion litres of milk a year in a market characterised by a shortage of milk and too much processing capacity. Murray Goulburn posted an A$371 million loss after taking A$416 million of impairments and one-time charges against its manufacturing facilities and other assets, and to forgive farmer debt under its unpopular and axed milk supply support package. Deutsche Bank is advising the Melbourne-based dairy processor on a comprehensive strategic review and said in June it had received a number of confidential unsolicited proposals including full takeover from third parties.

Bidders are reportedly circling what has become a "financially challenged" dairy company unable to compete on milk price, and at risk of being unable to stem an exodus of farmer-suppliers to rivals such as Fonterra, says Michael Harvey, a senior dairy analyst at Rabobank in Melbourne.

It took in 2.7 billion litres of milk in FY 2017, down 22 percent on the year and is forecasting a 26 percent slump in its milk intake for 2018 to 2 billion litres. Fonterra has been one of the biggest beneficiaries. Its Australian milk collection jumped 28 percent in July, the first month of the season, as it welcomed 50 farmers who had been supplying rival processors. Fonterra's 2016/2017 Australian milk collection jumped by 500 million litres to about 2 billion litres.

Murray Goulburn's forecast payment for the current season at A$5.20 per kilogram of milk solids is below the forecast payouts of rivals including Fonterra, Kirin Holdings' Lion, Saputo's Warrnambool Cheese and Butter and Bega Cheese.

The Australian newspaper reported yesterday that Yili joins China Mengniu Dairy, Canada's Saputo, Parmalat, Bega, Fonterra and Arla Foods.

Rabobank's Harvey said given its share of the milk pool, Fonterra may face competition issues from the Australian Competition and Consumer Commission. Bids by Saputo and Bega, with an existing presence in Australia, would also be likely to face ACCC scrutiny, while offshore bidders would require approval from Australia's Foreign Investment Review Board. Harvey said a range of factors left Murray Goulburn in "a complex situation".

"The ACCC will want to ensure healthy competition for milk supply in dairying regions," Harvey said. "Then you're dealing with very strong supporters of cooperatives among its shareholders."

The Australian Dairy Farmers lobby group has said a competitive and strong co-op was important for the dairy industry. Murray Goulburn's projected farm gate returns for 2017/18 came as "a severe disappointment to their farmer suppliers and the industry," the ADF said in June.

"Murray Goulburn has been a market leader for farm gate returns for the best part of three decades," it said. "It now finds itself unable to come close to matching the milk prices offered by other companies."

In May, Murray Goulburn announced it would close three of its factories as part of efforts to slash costs.

"One of the biggest tensions in the supply chain is the lack of milk supply and excess processing capacity," Harvey said. "The past 18 months have only exacerbated that. Feed costs were high, irrigation was expensive and the milk price dropped."

Adding to Murray Goulburn's woes and to the complexity for any takeover, the ACCC has filed proceedings against the company in the Federal Court alleging it and former executives Gary Helou and Bradley Hingle misled farmers about the likely milk payment for the 2015/16 year only to slash the price close to the end of the season. The hearing is expected sometime in the next 12 months. Also potentially in the wings is Lion coming into play, with reports it is looking to exit the Australian dairy market.

Harvey said Rabobank is a strong believer in the fundamentals of the dairy market over the long-term but with the proviso that it is a volatile commodity and that "at some stage the cycle will turn down again, leading to lower prices." Murray Goulburn's "new look" board and management deserved credit for grasping the nettle and conducting an exhaustive review and there is "hope that they will do the right thing."

"The reality is that we're on the verge of some pretty big consolidation of the industry," he said. Murray Goulburn "has some good assets that would be of interest and they have milk supply attached to them. There's still strategic value in having that volume of milk (2 billion litres) in an export region like Australia."


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