Bega Cheese circling Lion Dairy as Saputo drops out

The Bega cheese factory in Coburg.

Bega Cheese is close to buying Lion Dairy for around $550m, with Saputo dropping out of the race for control.

Bega is the favourite but is already leveraged at some 2.3 times earnings, with a stated goal to get the ratio under two times — something only possible with an equity raising.

Chairman Barry Irvin could surprise by using more debt for the deal, noting interest rates are at record lows and that Lion earnings currently depressed because COVID-19 has killed food service earnings.

The heroic Bega multiple comes ironically enough in part because of promised cost-cutting and new plant at its Koroit facility.

Subscribers to its two most recent equity raisings are under water with the last for $250m in 2018 at $7.20 a share and before that $160m at $5.35. The stock has underperformed the market by 29 per cent over five years, by 47 per cent over three years and magically outperformed ahead of an equity raising by 26 per cent over the last 12 months.

Irvin is on record as wanting more brands and Lion gives him the second best cold storage supply chain in the country with flavoured milk and yoghurt brands.

But his recent acquisition track record is also mixed with the 2017 Mondelez acquisition for $460m yet to hit targeted earnings.