Toll road, rail deals await Sims’ green light

Rod Sims’ decision on Transurban’s WesConnex deal and Pacific National’s Acacia Ridge rail terminal buy will be keenly watched.

Bega chairman Barry Irvin. Illustration: Sturt Krygsman

ACCC chief Rod Sims last week hit the public stage marketing the commission’s work on future energy policy, but today the spotlight shifts away from the political process to actual merger decisions directly under his control, focusing on two dominant companies — Pacific National and Transurban.

Their acquisitions are subject not to political backroom dealing but a strict application of the law based on whether the deals will substantially lessen competition. This is the real bread-and-butter ACCC work.

Depending on which side of the fence you sit, both deals arguably breach the law but they are lot more complex than that.

The ACCC rarely knocks back mergers.

In the 2018 financial year to May, the ACCC had 238 merger reviews of which 212 were cleared without question, 25 were subject to review, one opposed and six were withdrawn after ACCC started its work.

Sims is about to enter his final year at the ACCC, a period in which past chairs have sometimes taken a little walk on the wild side to lay down a legacy. Today’s decisions may well see that unfold. Of course, he is but the chair and the decision is taken by the commission with the help of a dedicated staff applying the law, not writing epitaphs.

For Scott Charlton at Transurban, clearance of his $17 billion West Connex deal is subject to any legal appeal, but obviously it is a line in the sand: whether he can continue to bid for new Australian toll roads.

Airline fund manager Emma Goodsell told a Magellan marketing luncheon in Melbourne yesterday that regulatory risk and leverage were two reasons Transurban was not on its list of top 10 stocks. Transurban owns 11 of the 15 toll roads and to win them it often engages in a competitive tender ending with the respective state government setting the tolls. Pacific National’s Dean Dalla Vale is confident of his chances of getting clearance for his $220 million purchase of the Acacia Ridge rail terminal and joint venture of intermodal rail in Queensland from Aurizon.

The deal came with Aurizon withdrawing from its interstate intermodal business, which boosted PN’s market position.

Rival Qube has talked up a storm against the deal, including the Aurizon decision to close interstate container traffic and with that potential ancillary legal ­action under section 45 of the Act.

Bega braces for battle

Bega now faces a battle with global dairy giants Fonterra and Saputo to grab more milk to fill its newly acquired Koroit plant in Western Victoria.

The $250m acquisition will add only $20m to its forecast earnings before interest tax, depreciation and amortisation of $126m this financial year, according to the firm.

The purchase price is half the book value of $500m in part because it is processing 300 million litres of milk against capacity of more than 800 million litres.

Bega only sources 100 million litres of milk a year from the region and will have to invest substantially to increase supply to make the plant work.

Next problem is the plant, which is a first-class milk powder operation, or what is known in trade as GUMP level or grown-up milk powder.

The high value-added end of the market is in baby powder or so-called nutritionals, which ­Koroit doesn’t have.

US giant Mead Johnson was considering investing in a new plant at the facility to make nutritionals in a joint venture with former owner Murray Goulburn.

But it got fed up dealing with MG and instead approached Barry Irvin at Bega and paid him $200m for a nutritionals plant at Tatura.

Question then is why Bega is stepping up to the plate paying top dollar for a commodity business.

Next question is why the market has added 11 per cent to Bega’s value in the past five trading days to yesterday’s close at $8.05 a share.

On Morgans’ numbers this works at a stunning 25 times forecast earnings per share of 31.9 cents.

The answer is provided by today’s graph showing the six-month gap last year, between the January $460m Vegemite acquisition and the June placement raising $122.5m.

In that time, the stock increased from around $4.20 a share to $5.35 a share and Bega is assuming the same happens again.

Heading into yesterday’s announcement, there was an 8 per cent short position on the stock so this is a class short squeeze.

Just whether the deal is as commercially successful as the market assumes is not so certain.

Some in the market took yesterday’s statements as ruling out a capital raising sometime in the next 12 months on the back of this deal.

That would be a 150 per cent wrong reading — there will be an equity raising and there needs to be one to both keep gearing low and to make the necessary investment to upgrade the plant and gather milk supplies.

Bega will no doubt be relying on its good name and an opening milk price of $5.85 a kilogram of milk solids.

This is the same price being offered by Fonterra but 10c a kilogram more than Saputo.

Dairy farmers are commercial animals so an extra 10c a litre maybe all that is needed, assuming Saputo doesn’t respond and in any case this competition is why the ACCC wanted Koroit sold to clear the MG acquisition.

Bega chair Barry Irvin is holidaying in Africa at present to keep a family commitment, in between completing the long-expected deal that was signed yesterday.

The deal is subject to ACCC approval, but this is expected as it will now open the way for a three-way bidding battle in the region, restoring the position prior to this year’s $1.3bn Saputo acquisition of Murray Goulburn.

The Weekly Times reported yesterday that Saputo emerged from that deal with a $170m bonus, namely the cash left in the bank at the last remaining Victorian milk co-op.

That cash is at odds with MG’s claim it was on its knees and forced to give itself up for sale, but history has now already been written.

Fonterra has flagged a potential new co-op, but talk in the trade says it was not exactly rushed off its feet by farmers, with one-third in favour, one-third against and one-third not caring either way.

Saputo is committed to supplying 300 million litres to the 800 million litres Koroit facility until the end of June 2020, but Irvin is obviously hoping he can transfer that milk to his company away from Saputo.

Saputo is now Australia’s biggest milk processor at 3 billion litres, followed by Fonterra at two billion litres, Lion and Parmalat at one billion a piece and Bega at 650 million litres.

Lion and Parmalat tend to be more fresh milk providers while the others are more processors.

The Koroit facility, with the appropriate investment, will boost Bega’s powder capacity, which will add to existing facilities in Tatura in the north of Victoria.

Bega’s Vegemite and peanut butter deals boosted its non-dairy earnings to 25 per cent of the total.

But this deal marks a return to its roots albeit with some big question marks and a battle brewing in western Victoria for more milk against global behemoths Fonterra and Saputo.